Whiplash in The Forex Market
The whiplash is a radical unexpected price movement that makes Forex trading very dangerous.
The Forex market first breaks out of consolidation after hearing the news from the first fundamental announcement, then turns to break out on the other end of consolidation after hearing the news from the second fundamental announcement.
After the whipsaw, the market returns to consolidation. The Forex trading market will eventually either break out in response to another fundamental announcement or move in the direction of the pre-consolidation trend (Uptrend or Downtrend).
If you were actively Forex trading during this time and set up a straddle trade when the market whipsawed, you would be locked in a loss where the loss equaled the size of the consolidation range (plus 10-15 pips on either side) because your buy and sell orders were both filled.
How to Trade the News Using the Straddle Trade Strategy ?
Follow the rules for trading a consolidation and a breakout (straddle trading):
- Find consolidation in a tight Forex trading range (20-60 pips for at least 6 hours).
- Check for upcoming fundamental announcements.
- Find support and resistance and set your straddle orders 15 minutes before the fundamental announcement is scheduled.
- Practice sound money management – If the consolidation range is more than 60 pips there may be too much potential risk in the trade (too much money to be lost between entry and stop loss should the trade not work out).
- Create a trading plan – Trade the plan. In this case, specifically, make a plan for what you will do if prices do not break out of the consolidation (you fall into a bull or bear trap or prices whipsaw).
If you’re going to use a straddle in your Forex trading, you’re eventually going to get Forex whiplash. By following the rules listed above, hopefully it won’t sting too bad.
In my next blog posts, I’ll be covering more examples of Forex straddle trades for you to make explosive profits with your Forex trading!
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