The forex market is the most leveraged financial market in the world. In equities, standard margin is set at 2: In options, the leverage increases to In the futures markets , the leverage factor is increased to However, none of these markets approaches the intensity of the forex market, where the default leverage at most dealers is set at Why is this important? First and foremost, the high degree of leverage can make FX either extremely lucrative or extraordinarily dangerous, depending on which side of the trade you are on.

In FX, retail traders can literally double their accounts overnight or lose it all in a matter of hours if they employ the full margin at their disposal, although most professional traders limit their leverage to no more than But regardless of whether they trade on In this article, you'll learn how to use stops to set up the " stop hunting with the big specs" strategy.

Precisely because the forex market is so leveraged, most market players understand that stops are critical to long-term survival. The notion of "waiting it out," as some equity investors might do, simply does not exist for most forex traders.

Trading without stops in the currency market means that the trader will inevitably face forced liquidation in the form of a margin call. With the exception of a few long-term investors who may trade on a cash basis , a large portion of forex market participants are believed to be speculators , therefore, they simply do not have the luxury of nursing a losing trade for too long because their positions are highly leveraged.

Because of this unusual duality of the FX market high leverage and almost universal use of stops , stop hunting is a very common practice. Although it may have negative connotations to some readers, stop hunting is a legitimate form of trading.

Forex Stop Loss Hunting & 2 Simple Ways To Avoid It

It is nothing more than the art of flushing the losing players out of the market. In forex-speak they are known as weak longs or weak shorts. Much like a strong poker player may take out less capable opponents by raising stakes and "buying the pot," large speculative players like investment banks , hedge funds and money center banks like to gun stops in the hope of generating further directional momentum.

In fact, the practice is so common in FX that any trader unaware of these price dynamics will probably suffer unnecessary losses. Because the human mind naturally seeks order, most stops are clustered around round numbers ending in " This fact alone is valuable knowledge, as it clearly indicates that most retail traders should place their stops at less crowded and more unusual locations.

More interesting, however, 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.

In her book "Day Trading The Currency Market" , Kathy Lien describes one such setup based on fading the "00" level. The approach discussed here is based on the opposite notion of joining the short-term momentum. The "stop hunting with the big specs" is an exceedingly simple setup, requiring nothing more than a price chart and one indicator.

Here is the setup in a nutshell: This point area is known as the "trade zone," much like the yard line on the football field is known as the "redzone. The idea behind this setup is straightforward.

Once prices approach the round-number level, speculators will try to target the stops clustered in that region. Because FX is a decentralized market , no one knows the exact amount of stops at any particular "00" level, but traders hope that the size is large enough to trigger further liquidation of positions — a cascade of stop orders that will push price farther in that direction than it would move under normal conditions.

The stop on the trade would be 15 points back of the entry because this is a strict momentum trade. If prices do not immediately follow through, chances are the setup failed.

The profit target on the first unit would be the amount of initial risk or approximately 1. The target on the second unit would be two times initial risk or 1.

Forex Trading Education - How Stop-loss Hunting Occurs

Aside from watching these key chart levels, there is only one other rule that a trader must follow in order to optimize the probability of success.

Because this setup is basically a derivative of momentum trading, it should be traded only in the direction of the larger trend. There are numerous ways to ascertain direction using technical analysis , but the period simple moving average SMA on the hourly charts may be particularly effective in this case. By using a longer term average on the short-term charts, you can stay on the right side of the price action without being subject to near-term whipsaw moves.

Let's take a look at two trades — one a short and the other a long — to see how this setup is traded in real time. As prices approach the 1. In this particular example, the downside momentum is extremely strong as traders gun stops at the 1. The first half of the trade is exited at 1.

In this case, the pair trades well above its period SMA and, therefore, the trader would only look to take long setups. EST, the pair trades through the In the next hour, the longs are able to push the pair through the The longs can't sustain the buying momentum and the pair trades back below Only two hours later, however, prices once again rally through This time, both profit targets are hit as buying momentum overwhelms the shorts and they are forced to cover their positions, creating a cascade of stops that verticalize prices by points in only two hours.

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 market dynamics.

Instead of being victims of stop hunting expeditions, retail traders can finally turn the tables and join the move with the big players, banking short-term profits in the process. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin?

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Stop Hunting With the Big Forex Players By Boris Schlossberg Updated March 27, — 6: Stops are Key Precisely because the forex market is so leveraged, most market players understand that stops are critical to long-term survival. Taking Advantage of the Hunt The "stop hunting with the big specs" is an exceedingly simple setup, requiring nothing more than a price chart and one indicator.

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. If holding on to losing trades is human nature, this tool will help protect you from yourself. There are several simple strategies you can use to protect yourself from downside risk.

Stop Hunting With The Big Forex Players

Currency trading offers far more flexibility than other markets, but long-term success requires discipline in money management. A soft stop provides a trader with added flexibility, allowing him to react to ongoing changes in the market. Hate getting stopped out right before the price reverses? This forex trading strategy may help. Three types of profit protection stops lock in profits at different stages in the progression of a successful trade. Combine trailing stops with stop-loss orders to reduce risk and protect portfolio value.

Finding the right position size can minimize loss for a trader. Place the stop loss where, if hit, the reasons you took the trade are no longer valid. Discover whether it is considered best practice to use stop losses or limit orders. Both options have their advantages and Learn about trailing stop orders, how to use them and when they should be used through an extensive example.

Read about some theories on stop-loss placement and how traders use stop-loss orders to hedge against losses and capture Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

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