FOREX stop is a stop-loss order for the foreign currency exchange (FOREX) market. The way a FOREX stop works is simple. If the value of the currencies the investor is invested in reaches a certain point, said investor's broker is instructed to sell the currency. That way, the investors may lose some money, but they will still get some value on their investments, bringing their losses to a minimum. There are five types of FOREX stops: chart stop, volatility stop, equity stop, margin stop and the disaster stop. Each is designed to respond to certain economic indicators.

FOREX Stops and FOREX Trading

Since investors can't keep an eye on their investments all the time, they hire brokers to do that for them. Normally, it is up to the investors to decide whether their currency investments should be sold. However, financial conditions can change rapidly, and the investors may not always be in position to order the sale. For example, they may be hiking or on vacation. FOREX stops allow brokers to sell their investments without consulting the investors, saving time and money for everyone involved.

Chart Stop

Chart stop is a FOREX stop that is based on the graphical analysis of price charts. Price chart is a chart that contains the information about the values of the currencies during the course of a certain period (usually a day). The prices are plotted in the form of a graph. When the graph arrives at a certain point, the chart stop comes into effect, and the broker sells the investor's stocks.

Volatility Stop

Volatility stop is a FOREX stop that is based on market volatility. Volatility is the statistical measure of the market's uncertainty. It is calculated by analyzing how much the value of the currency changes in response to the changing market conditions (such as the price of precious metals, number of homes sold, etc). The less the value changes in response to market conditions, the less volatile it is. If the currency's market volatility gets too high, the broker will sell it.

Equity Stop

Equity Stop is a FOREX stop that is based on how much money is lost during each day. The loss is calculated by comparing the value of the currency at the beginning of the trading day and its value at the end of the trading day. If the loss reaches a certain amount, the broker sells the currency. The investor has a right to set that amount, but many investors leave it up to their brokers.

Margin Stop

Margin stop is a FOREX stop that is based on the currency investments' marginal balance. Marginal balance is the portion of the value of the investments (usually one tenth of the value). If the margin balance falls below its starting value, the margin stop is triggered, and the broker sells off the currency.

Disaster Stop

Disaster stop is a FOREX stop that occurs if the country that issues the currency the investor is invested in suffers from a disaster. This can be a natural disaster, such a high-scale earthquake, or a human-made disaster, such as an oil spill or a terrorist attack. While some countries can recover from disasters better than others, every country inevitably suffers some financial loss when hit by such a situation, causing the value of its currency to go down and stay down until the country recovers. It is up to the investor to decide which disasters are significant enough to warrant a disaster stop, but the investor should decide that ahead of time.

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