1. WHAT IS A STRADDLE STRATEGY?

The straddle strategy is a trading strategy with two buy/sell pending orders placed on either side of a given price and this strategy is used for break trading.

This strategy is used when you expect or expect a large and sudden price movement to take place, but when you are not sure which direction it will take.

The picture above depicts how the Straddle strategy works, we do it as follows:
  • Place both Buy Stop and Sell Stop pending orders above and below a price range.
  • Where to place a buy pending order, we place a stop loss for a sell pending order and vice versa.
  • Take profit we set at a very small distance from the width of the price range (We trade the RR ratio to take advantage of the stop loss when the big news comes out - this part will be introduced in detail below)
  • We cancel one pending order when the other is matched (Or if you are confident you can keep both orders)
One of the things that makes Straddle strategies appealing is that they have a well-defined RR ratio. This is very useful for our trading plan. In the picture above, we have the first 2 scenarios which are 2 profitable scenarios, and the bottom 2 scenarios are the scenario where we have a loss. The maximum loss we accept in a trade is the distance between the 2 price ranges we place the pending order. For example, if the distance between them is 50 pips, this is the worst-case scenario and biggest risk we could face.

2. WHEN TO USE STRADDLE STRATEGY?
  • When you expect a strong breakout to appear.
  • When the current volatility level is not too much
  • The market moves strongly (usually after big news).
It is difficult to determine when the market moves strongly. This often occurs when major events such as FOMC policy meetings and announcements have an unusually large impact. It takes a while for the market to digest and assimilate all of this and it can cause a lot of volatility (see below) in the interim. Here is an example of the Straddle strategy:


In the example above, the Straddle strategy came into play when the ECB's monetary policy was announced. The price fell before the news was released, touched on the pending sell order, and rolled over the TP (Set very short - about 100-150 points) before reversing - Notice the distance on the picture is 40 pips ( 400 points)

THE STRATEGY WILL NOT WORK IN THE ENVIRONMENT:
  • There are no clear triggers for a price breakout (news, events).
  • Volatility was high before.
  • Do you have a good prediction of the direction (a strong trend?).