Forex Trading Strategies – Straddles & Breakouts

Straddles

Straddles are options that consist of a purchase of both a call and push option that has the same expiration date and same barrier or strike price. It is exercised on the same future contract or currency pair, and since essentially, it is a purchase of two separate options, the expense for these types of trades is higher.

The purchase of a straddles involves picking a range around the current price of a currency and setting equal barriers below and above the price. The advantage, of these types of trades, lies in their returns, which are generally very large.

Long and Short Straddles

There are two different types of straddles that can be held, either long straddles or short straddles. A long straddles is usually purchased when a trader feels that the future that they have purchased into, will be making a substantial move in either direction. Short straddles are when a trader feels the opposite way, that the market will not be fluctuating much or even at all within the time period before the expiration date.

Long straddles choose a call and put price, and then if the price of the future falls between those prices then the investment will be lost. Again the opposite is true when looking at a short straddle where the investment is lost if the price of the future falls outside of the chosen call and put prices.

Factoring Volatility

Straddles can also be a net loss of investments when, at expiration, the underlying commodity is less than the sum of the premiums that are paid for both call and put prices. The largest amount of loss when trading using a straddle occurs when at expiration the currency pair’s, or other underlying assets’ price exactly equals the options’ strike price. Thus it is important to study and follow the volatility of the underlying commodity which the straddle is placed on.

Breakouts

Breakouts are another type of strategy used in trading, and among the most popular in technical analysis strategies. It looks at the recent trading range of an asset as a chart pattern, but focuses on periods when the market does not move very much in a given time period.

As soon as the price has moved out of his static range, traders will buy large volumes of the commodity in hopes that the direction of the breakout will continue, and generates buy and sell signals. These signals are best implemented when the trade is accompanied by entering a stop loss order that will prevent loss on the large volume of assets purchased that can be created by a false breakout.