Popularity of Forex trading is bringing hundreds, if not thousands, of new traders into the markets every day. Most of these new participants are introduced to contracts because they purchased a trading book, course or some other tool which promises to forecast which direction market will go in the future. All what's left do is to place trades and reap rewards.

Unfortunately, even the best methods do not work all the time. Some loses are inevitable and even expected. Some can last for a prolonged time period. During these times traders, newbies and experienced alike, start doubting their trading systems and search for a new angle. Internet allows access to numerous sources of information. Trouble is, there can easily be an information overload, causing total confusion. Trader can not decide which direction to trade, loses confidence in his abilities and his decision making process becomes erratic.

There are ways to trade without guessing or even caring which way the market will go over some period of time. One of them is using straddles. A "straddle" is placing both buy and sell orders above and below current price. When this happens, trader is said to be "straddling" the market. Trader also does not have a directional bias, just expects a move either way. Most straddle trading methods will have all other elements of trading in place: stop / loss for both legs of the straddle, target price or the length of trade.

There are entire systems based on this style of trading. Some of them do nothing but place straddle orders all the time. Traders never care which way the markets will go, as long as they move. These kind of systems call for updating the orders every predetermined time interval. For example, once a day. This means that old orders / trades must be taken / closed every day at the same time. That is when new orders are placed. People looking for mechanical trading strategies may find this approach suitable, since the same thing is done over and over again without any in depth analysis.

Another way of using straddles involves fundamental announcements. A lot of these events cause rapid price movement, yet the direction of moves after number releases is notoriously difficult to predict. Particularly popular among traders are FED interest rate announcements and unemployment data release. These are also times when a great deal if indecision is present, resulting in both legs of straddle being stopped out. In spite of its popularity, this is perhaps the worst way of using straddles.

More promoting approach is capitalizing on range contracting. This can be done on most time frames 4H and higher. For example, if daily trading ranges of given currency pair start to get smaller and smaller, it is likely that a larger move will follow. The longer the contracting period, the larger potential move after it. If one has hard time deciding which way to trade, it would be very easy to place a straddle order. Very simple way to implement this strategy is to place the orders just above previous bar's high and under the low. Stop loss could be about half of last bar range, with a target of something like twice the value of stop, or maybe close the position at the end of the time value used. For the weekly bar close would be at the end of the week, daily bars would dictate closing position at the end of the day.

These opportunities happen all the time, depending on time frame. Current example is a monthly chart of EUR-GBP. Ranges of last 3 bars have been getting smaller, which may present an opportunity for a successful straddle trade. The buy order can be placed at 0.8035 and sell at 0.7840. Protective stop of 80 pips for each order is about right. Profit target of 150 pips is in line with risk. Alternative exit is at the end of July, regardless of profit or loss.

Trading straddles is very easy to implement and can be profitable. Like any trading strategy, there is a potential for loss. Should one decide to use them on regular bases, a mechanism for precise levels of stop / loss and profit must be incorporated. All out straddle based trading systems can be especially attractive to traders who do not have to time to spend all day in front of computer.



Source by Mike Kulej