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Forex Catastrophe – Straddle Trading Whiplash

Another variation on the currency trading consolidation breakout in the forex is a whiplash, which occurs when two forex fundamental announcements that have the opposite effect are released consecutively. 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.

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.

Rules for Straddle Forex Trading

Follow the rules for trading a consolidation and a breakout (straddle trading):

1. Find consolidation in a tight forex trading range (20-60 pips for at least 6 hours).
2. Check for upcoming fundamental announcements (at fx360.com’s economic calendar)
3. Find resistance and support and set your straddle orders 15 minutes before the fundamental announcement is scheduled.
4. 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).
5. 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   I’ll be covering more examples of forex straddle trades for you to make explosive profits with your forex trading!

Posted in Fundamental Announcements

Currency Trading Price Consolidation Breakouts

Every consolidation in forex charts will eventually end in a breakout in currency trading (usually wild and fun!)

When currency traders identify a price consolidation, they usually anticipate a breakout to follow. A breakout occurs when prices break out of consolidation, penetrating the support (downward breakout) or resistance (upward breakout) lines.

To profit from a consolidation and breakout, you will need to make a straddle trade. Because you cannot know when currency trading whether the market will break out of consolidation downward or break out upward, you need to prepare for either (thus you are straddling the consolidation). Place one order to buy 15 pips above the level of resistance and another order to sell 10 pips below the level of support.

Why place your buy and sell orders beyond the levels of resistance and support in the forex? Otherwise, you could be entered into the market when it is still in consolidation, by a relatively minor 5 or 10 pip spike within the consolidation.

You don’t want to enter until just before the fundamental announcement (the anticipated breakout point). Why place your buy order 15 pips above the level of resistance and your sell order only 10 pips below support? Remember that the chart you look at is a bid chart, but the price you buy at is the ask (which, remember, is about 5 pips above the bid price).

Trading inside consolidation

While currency trading breakouts from consolidation can lead to solid profits, if the consolidation range is large enough, it is also possible to profit from trading inside the consolidation.

This would be a consolidation you would not want to place a straddle on, however (if the trading range is wide enough to profit from trading the consolidation it would be too risky to straddle).

In this case you would sell at the resistance level with a profit limit at the level of support and a stop loss at the last level of resistance. You would also want to buy at the support level with a profit limit at the level of resistance and a stop loss at the last level of support.

Posted in Fundamental Announcements

Consolidation in Forex Charts

It’s important to notice when prices are moving sideways in forex price charts. When this happens, you’ll want to use different rules for trading forex.

The market is always moving relative to time on forex charts.

It can move in three directions: upward, downward, and sideways.  If the market is moving upward or downward it is trending and if it is moving sideways it may be in consolidation.

Consolidation (also referred to as accumulation, bracketing, or sideways movement) occurs when prices establish a tight trading range create somewhat equal levels of support and resistance (that is, the support and resistance lines are roughly flat and parallel to each other).

To qualify as consolidation prices must be moving horizontally in a tight trading range (20-60 pips between the high and the low of the given trading period) for 6 hours or more.  Each forex chart has its own overall trading range, while consolidation ranges can exist within that forex chart.

Forex Price Consolidation

Consolidation usually (but not always) occurs right before a major breakout.  There are two key reasons why the market would be in consolidation: first, forex prices on the charts have reached the value that traders are willing to pay (not more, not less).

In this case the game between the bulls and the bears is tied up.  As in any game, however, one team will pull out ahead again eventually.  The second reason why the market would be in consolidation is that traders are not trading, because they’re waiting for a fundamental announcement.

In my next blog post, I’ll describe the basics of forex fundamental announcements. Understanding what to look for and what to avoid in forex fundamental announcements is a valuable skill to have when looking at forex charts and trading the forex market online!

Posted in Forex Basics