The forex market is the most highly 澳洲幸运5开奖号码历史查询:leveraged financial market in the world. Traders take on debt to acquire larger positions than they could with only their cash on hand. The standard margin is set at 2:1 in equities markets. A trader must put up at least $50 cash to control $100 worth of stock. The leverage may increase to 10:1 in options with $10 controlling $100. The leverage factor can be as high as 20:1 in the 澳洲幸运5开奖号码历史查询:futures markets but it depends on the broker.

Leverage in Forex Markets

A trader needs only $2,500 to control $50,000 worth of stock in a 澳洲幸运5开奖号码历史查询:Dow Jones futures e-mini contract. None of these markets approaches the intensity of the forex market, however, where the default leverage at most dealers is set at 100:1 and can rise to 200:1.

A mere $50 can control up to $10,000 worth of currency. The high degree of leverage can make FX either extremely 澳洲幸运5开奖号码历史查询:lucrative or extraordinarily dangerous depending on which side of the t🍸rade you're on.

Retail traders in FX can double their accounts overnight or lose it all in a matter of hours if they employ the full margin at their disposal. Most professional traders limit their leverage to no more than 10:1, however, and never assume such enormous risk. Almost everyone in FX trades with stops regardless of whether they trade on 200:1 leverage or 2:1 leverage. It's important to learn how to use stops to set up the "澳洲幸运5开奖号码历史查询:stop hunting with the big specs" strategy.

Stops Are Key

Most market players understand that stops are critical to long-term survival because the forex market is so leveraged. The notion of "waiting it out," as some equity investors might do simply doesn't exist for most forex traders. Trading without stops in the currency market means the trader will inevitably face forced liquidation in the form of a 澳洲幸运5开奖号码历史查询:margin call.

Except for a few long-term investors who may trade on a 澳洲幸运5开奖号码历史查询:cash basis, a large portion of forex market participants are believed to be 澳洲幸运5开奖号码历史查询:speculators. They simply don't have th🧜e luxury of nursing a losing trade for too long because their positions are highly leveraged.

Stop Hunting Is Legit

Stop hunting is a legitimate form of trading. It's nothing more than the art of flushing the losing players out of the market. They're known as weak longs or 澳洲幸运5开奖号码历史查询:weak shorts in forex-speak. Large speculative players like 澳洲幸运5开奖号码历史查询:investment banks, 澳洲幸运5开奖号码历史查询:hedge funds, and money center banks like to gun stops in the hope of generating further directional momentum. The practic꧃e is so common in FX that any trader unaware of these price dynamics will probably suffer unnecessary losses.

The human mind naturally seeks order so most stops are clustered around round numbers ending in "00." Most stops would reside within one or two points of the 1.2500 price point rather than 1.2517 if the EUR/USD pair was trading at 1.2470 and rising in value. This is valuable knowledge because it indicates that most retail traders should place their stops at less crowded and more unusual locations.

More interesting is the possibility of profit from this unique dynamic of the currency market. The fact that the FX market is so stop-driven gives scope to several opportunistic setups for short-term traders. Kathy Lien describes one such setup based on fading the "00" level in her book "Day Trading the Currency Market" (2005). The approach discussed is based on the opposite notion of joining the short-term momentum.

Taking Advantage of the Hunt

The "stop hunting with the big specs" is an exceedingly simple setup that requires nothing more than a price chart and one indicator.

Mark lines 15 points on either side of the round number on a one-hour chart. The trader would mark off 1.2485 and 1.2515 on the chart if the EUR/USD is approaching the 1.2500 figure. This 30-point area is known as the "trade zone." Participants have a high probability of scoring once they enter this area.

The idea behind this setup is straightforward. Speculators will try to target the stops clustered in that region when prices approach the round-number level. FX is a decentralized market so one knows the exact amount of stops at any particular "00" level. Traders hope that the size is large enough to trigger further liquidation of positions: A cascade of stop orders that will push price further in that direction than it would move under normal conditions.

The trader would go long the pair with two units as soon as it crossed the 1.2485 threshold if the price in the EUR/USD was climbing toward the 1.2500 level. The stop on the trade would be 15 points back of the entry because this is a strict momentum trade. Chances are the setup failed if prices don't immediately follow through.

The 澳洲幸运5开奖号码历史查询:profit target on the first unit would be the amount of initial risk or approximately 1.2500. The trader would move the stop on the second unit to break even to lock in profit at this point. The target on the second unit would be tw♚o times the initial risk or 1.2515, allowing the trader to exit on a momentum burst.

One Other Rule

There's only one other rule that a trader should follow to optimize the probability of success. This setup is a derivative of momentum trading so it should be traded only in the direction of the larger trend. You can ascertain direction using 澳洲幸运5开奖号码历史查询:technical analysis in numerous ways but the 200-period 澳洲幸运5开奖号码历史查询:simple moving average (SMA) on the hourly charts ෴may be particu🌌larly effective in this case.

You can stay on the right side of the 澳洲幸运5开奖号码历史查询:price action without being subject to near-term whipsaw moves by using a longer-term ave🐼rage on the short-term charts.

Some Examples

Let's take a look at two trades to see how this setup is traded in 澳洲幸运5开奖号码历史查询:real time. One is a short and the other is a long.

The EUR/USD is trading well below its 200 SMA on June 8, indicating that the pair is in a strong 澳洲幸运5开奖号码历史查询:downtrend. The trader would initiate a short the moment price crosses the 1.27🉐15 level as prices approach the 1.2700 level from the downside, putting a stop 15 points above the entry at 1.2730.

The downside momentum is extremely strong as the trader's gun stops at the 1.2700 level within the hour. The first half of the trade is exited at 1.2700 for a 15-point profit and the second half is exited at 1.2685, generating 45 points of reward for only 30 points of risk.

This example in Figure 2 also takes place on the same day but the "trade-zone" setup generates several opportunities for profit over a short period as key stop cluster areas are probed over and over.

The pair trades well above its 200 period SMA and the trader would therefore only look to take long setups. The pair trades through the 113.85 level at 3 a.m. EST, triggering a long entry. The longs can push the pair 𒈔through the 114.00 stop cluster level in the next hour and the trader would sell one unit for a 15-point profit, immediately moving the stop to breakeven at 113.85.

The longs can't sustain the buying momentum and the pair trades back below 113.85, taking the trader out of the market. Prices once again rally through 113.85 only two hours later, however, and the trader gets long once more. Both profit targets are hit this time as buying momentum overwhelms the shorts and they're forced to cover their positions. This creates a cascade of stops that verticalize prices by 100 points in only two hours.

The Bottom Line

The "stop hunt with the big specs" is one of the simplest and most efficient FX setups available to short-term traders. It requires nothing more than focus and a basic understanding of currency 澳洲幸运5开奖号码历史查询:market dynamics. Retail traders can final𝔍ly turn the tables instead of being victims of stop hunting expeditions. They can join the move with the big players, banking short-term profits in the process.

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