Definition – What does Straddle mean?
A straddle is a forex strategy that uses limit orders to place a trade that will profit on a strong movement in either direction. When the trader is uncertain of the direction a currency pair will take, but certain that a big swing is coming, he can place a limit order to sell after the pair breaks its recent lows and another order to buy when it breaks its recent highs. The stop loss orders can be placed within the average daily range to prevent large losses if the pair hits both orders but then moves sideways.
ForexTerms explains Straddle
The straddle was originally an options strategy, but the order structure of the forex market allows traders to place using limit orders. By moving the orders outside the regular trading range and putting stops in the range, the trader is ideally placed to catch a strong movement up or down, with a set loss as the downside if neither scenario develops. The catch is that a trader has to decide where to place the orders for the highest probability of profit. Too far out and a strong, but faltering movement is missed. Too close in and the volatility before the actual trend is established may activate and stop out the orders. Like any forex strategy, it is best to practice straddling in demo accounts and backtest the order placement before trading in the live market.
