Today FOREX world is built around large leverage and constant use of
margin, in equities, standard margin is set at 2:1, in options, the
leverage increases to 10:1, in the futures market, the leverage factor is
increased to 20:1, but in the FOREX market the leverage sets the highest
bar by increasing to 100:1 ratio and can climb up to 200:1 meaning that
you can invest $100 for a $20,000 value control! An experienced trader
would limit his leverage to no more than 10:1.
Alongside leverage usage, or as in many FOREX rookies. cases using too
much leverage, comes the opportunity for either extremely profitable or
extraordinarily dangerous and huge loses. You can double your account
overnight or lose it all in a matter of hours if you make use of the full
margin at your disposal. Considering that fact, most FOREX traders use
.stops. order / .stop-loss. - they simply do not have the luxury of
nursing a losing trade for too long because their positions are highly
leveraged, and here you can step in and take advantage of this knowledge.
Stop order in a nutshell is a form of insurance or security measure that
is given to buy or sell when a currencies' price surpasses a particular
point. Using stop loss is critical for long-term survival. By setting a
predetermined entry or exit price, investors usually use this system to
minimize their loses when off for the business day or any other situation
in which they are unable to monitor their portfolio for an extended
period.
The main FOREX strategy which takes advantage of this knowledge is .Stop
Hunting. , which attempts to force some foreign currency exchange
investors out of their positions by driving the price of a currency pair
to a level where many investors have chosen to set their stop-loss orders
(aka .weak longs.), by understanding that the human mind naturally seeks
order, most stops are clustered around round numbers ending in "00" (i.e.
if the EUR/USD pair was trading at 1.1380 and rising in value, most stops
would reside within one or two points of the 1.1400 price point rather
than, say, 1.1417). Absorbing that fact alone is priceless knowledge (the
price of a currency pair can experience sharp moves when many stop losses
are triggered); professional traders place their stops at less crowded and
more unusual locations. The possibility of profit from these unique
dynamics of the foreign currency market is huge and proven.
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