In this setup, you are working with a downward trend. As such, the main point here is to identify the resistance level as this point will indicate where you can expect the maximum profit to take place. Also, support levels are not particularly relevant. However, it would help to spot any double or triple bottoms so that you can ascertain where the low points may land. This can be used to help you set up your entry point.
Now, this setup is countertrend because the trendline is moving downward, yet you are looking to make money on the way back up once the price bounces back up off the floor. It should be noted that the platform will calculate a support level for you. So, a good rule of thumb in this setup is to make deals when the gap between the trendline and support level is the widest. This will enable a larger rebound. The shorter the gap between the trendline and the support level, the less money you stand to make. Additionally, you might be headed for a reversal. Thus, it might be best to sit this one out until you can spot the reversal.
To set up the trade, spot any double or triple tops. That will help you identify the points where you can expect the resistance level to be located. Then, look at the lows so you can set these up as your entry points. Last, set up your entry and exit points based on the lows and highs you have identified.
This strategy is quite useful if you are looking to make multiple trades in a single session. You may not get overwhelming returns, but this strategy will certainly help you get your feet firmly on the ground.
Stop Hunt Evasion
When investing in FOREX, it is always recommended that you set up stop-loss points in every trade. This is especially important when you are not planning to be at your terminal all the time. Some investors simply like to set up their trades and let the platform take care of the rest. That’s why you need to set up stop-loss points on every single trade.
To do this, simply enter the price point for your stop loss below your entry point. Earlier, we recommended a stop-loss point of 20 pips. For instance, if your entry point is 10, you can set up your stop-loss at 9.80.
The reason for setting up a stop-loss below your entry lies in the hope that the price will rebound even though it has gone below your entry point. So, you can still capitalize on the upswing of the price. If the price does not rebound for any reason, you have cut your losses before they get out of hand.
Now, just as you have set up your stop-loss point, so has every other investor. You can assume that practically all investors have set up their stop-loss points within a reasonable level. This means that when the price suddenly plummets, a flood of stop-loss orders is triggered. This leads to a further price fall.
Some investors love to hunt for stop-loss orders in order to capitalize on lower-than-usual prices. This is called “stop hunting.” To make money off this type of deal, you need to be keenly aware of the potential stop-loss points that other investors are setting up. Then, your aim is to capitalize on the stops so that you can catch the price of the currency pairing at the lowest possible point.
This is a highly speculative deal. This implies that you have no assurance that the price will rebound at the entry point you have selected. If anything, the price may still continue to go down further as the stop-loss orders continue to come in. Then, you might find yourself stuck in a position that’s quickly falling in price. Then, there is no guarantee that the rebound will even get back to the entry position.
A good way of playing the “stop hunting” game is to play the countertrend strategy. Of course, you would need to be in the presence of a falling trendline (the stop-loss orders should reflect that). If this is the case, then you can expect a reasonable chance of the price rebounding at the support level for the currency pairing in question.
Stop hunting is not recommended for beginners. This is why you should first familiarize yourself with the various trend strategies we have outlined in this chapter. Afterward, you can make a reasonable assumption about the possible shifts in price so that you can set up your trades accordingly. While you can certainly make significant gains by stop hunting, please be sure to keep an eye out for false signals. These signals can be flashed when you see a high sell volume, but the trendline is moving upward. So, do keep an eye on the trading volume as this is the best indicator of a large number of stop-loss orders being triggered simultaneously.