What is a straddle strategy, and how I apply it to my trades

Discover how the straddle strategy can help you navigate market uncertainty and capture profit opportunities during high-volatility events. In this guide, trading expert Haikel Ali breaks down how to apply the strategy—especially in CFD trading—with real-world examples and risk management tips.

In the world of trading, predicting which way the market will move isn’t always easy. Sometimes, you might have a strong sense that something big is about to happen—a major news event, an earnings report announcement, or a central bank decision—but you’re unsure whether the market will move up or down. In these moments, traders often turn to a strategy called the straddle. It’s designed to potentially profit regardless of whether the market is up or down. Now, I know you might be wondering, “Is this too good to be true?” In this article, we explore the straddle strategy in more detail, including some practical examples—particularly for CFD trading.

Content

1. What is a straddle strategy?
2. Straddle strategy in CFD trading
3. A practical explanation of straddle in CFD trading
4. The risk of using the straddle strategy in CFD trading
5. Tips when using the straddle strategy
6. Key takeaways  
7. Final thoughts

What is a straddle strategy?

A straddle strategy is a popular approach in options trading that traders use when they believe something big is about to happen in the market—but they’re unsure whether prices will rise or fall. It’s designed to try and profit regardless of the market direction. At its core, a straddle strategy involves placing two trades at the same time:

1. Buying a call option: The right to buy an asset at a certain price if the price goes up.
2. Buying a put option: The right to sell an asset at a certain price if the price goes down.

Both options are purchased at the same strike price and expire on the same date. The idea is simple: you don’t care whether the price goes up or down, as long as it makes a big enough move in either direction. If it does, one of those options will become valuable, and the gains on that option can offset the loss on the other.

This approach is called a long straddle strategy. There’s also a short straddle strategy, which involves selling both the call and put options with the expectation that the trading price will remain relatively stable. However, this article concentrates on the long straddle strategy. The long straddle strategy is the more popular choice among traders anticipating market volatility. It also can be adapted when applying a straddle approach in CFD trading.

Straddle strategy in CFD trading

While in option trading, a straddle involves buying (or selling) both call and put options on the same asset, traders can mimic the concept of a straddle strategy in CFD trading by using pending orders.

A common approach is placing two pending orders:

• A Buy Stop order above the current market price.
• A Sell Stop order below the current market price.

The idea is to catch a breakout in either direction, similar to a long straddle in options. This is often done ahead of high-impact news or economic events (like central bank decisions, Non-Farm Payrolls, etc.) when you expect high volatility but you're unsure about the direction.

A practical explanation of straddle in CFD trading

Identifying the breakout range

The first step is to consult the economic calendar to identify upcoming high-impact news events. It is advisable to perform this check approximately 45 minutes to one hour before the scheduled release. This preparation allows for a more thoughtful and informed approach to your trade.

Roughly 30 minutes before the news is released, open the 15-minute time frame on the chart of the instrument you intend to trade. At this point, carefully establish a trading range by drawing horizontal lines at the highest high and the lowest low of the last 10 to 15 candles. This helps define the key levels where significant price action may potentially break out.

Placing the pending orders

Once the range is identified, you may proceed by placing a buy stop order approximately 10 to 20 pips above the top of the range with a sell stop order approximately 10 to 20 pips below the bottom of the range (For more volatile instruments, it is often more prudent to set these stop orders 20 pips away from the established range to account for high-volatility price fluctuations). See the example on the chart below:

Stop loss and take profit setup

When placing both the buy stop and sell stop orders, it is important to set the corresponding stop loss and take profit levels as part of a well-rounded risk management approach.

For the stop loss, I typically set it at twice the distance of the range between the buy stop and the highest high, or the sell stop and the lowest low. For example, if the buy stop order is placed 15 pips above the highest high, I would generally place the stop loss for that trade 30 pips below the entry price. This method helps provide a balanced approach to managing potential risks while allowing room for natural price fluctuations.

Secondly, when setting the take profit, I adhere to my predefined risk-reward ratio (RRR) of 1:2. This means that for every 30 pips I am willing to risk, I aim for a take profit target of 60 pips from the entry price. Maintaining a consistent risk-reward ratio is an important part of my overall trading discipline, helping to ensure that potential rewards justify the risks taken.

Using trailing stops and manual adjustments

Additionally, if you are trading on a platform such as MetaTrader 5, which offers a trailing stop feature, you may consider setting your trailing stop at half the distance of your stop loss range. For example, if your stop loss is set 30 pips away from the entry price, you might set the trailing stop at around 10 to 15 pips.

If you are trading via the Exness Web Terminal, where the trailing stop feature is unavailable, you can manually adjust your stop loss after the order is executed and begin moving in a profitable direction. This manual approach allows you to manage risk and protect your gains as the trade progresses, just like using a trailing stop, which is essential in executing the straddle strategy. 

Managing the trade post-execution

Lastly, once the news is released and the market begins to move, one of your pending orders will be triggered. If the trade then moves in a profitable direction and activates your trailing stop—or, in the absence of a trailing stop, moves toward the profitable direction by at least half the distance of your predefined stop loss—you may cancel the remaining pending order and continue managing the position that has been executed, as seen in the example below:

If the price continues moving toward your take profit level, you may consider adjusting it. Personally, I move my take profit to match the range of my trailing stop as the price movement is favorable, allowing me to secure extra profit potential while maintaining the previous target that has been reached. See the example below:

The risk of using the straddle strategy in CFD trading

The straddle strategy can be highly advantageous during periods of uncertainty, as it allows traders to potentially minimize the likelihood of losses while maximizing returns, regardless of whether the market moves upward or downward. However, it is important to understand that this strategy is not foolproof. Like any approach in trading, the straddle strategy is not risk-free. Below are some of the potential challenges associated with its execution:

Whipsaw risk

Sudden price spikes are among the most common risks when implementing a straddle strategy. The market can trigger one of your pending orders (either a buy stop or sell stop) extremely quickly, only to reverse sharply—sometimes within seconds. This can activate both your buy and sell stop orders, potentially leading to consecutive losses.

Mixed data scenarios

A mixed data scenario occurs when an economic news release presents positive and negative outcomes. For example, on the first Friday of the month, the US Non Farms Payrolls data was positive, a bullish sign for USD. However, the unemployment rate data was negative, signaling a bearish outcome for the USD. Such conflicting signals can create market uncertainty and hesitation, often causing prices to consolidate and move sideways within a defined range. In these situations, both buy and sell stop orders may be triggered without a clear directional move, increasing the risk of consecutive losses.

Widened spreads and slippage

During periods of high volatility, it is common for brokers to widen spreads. However, if the spread widens too much, it can result in less favorable and premature stop loss execution. As for slippage, it can result in a less favorable entry price or one that is different from your requested price. Therefore, even if your initial trade setup is correct, spread widening and slippage can negatively impact your entry points and cause premature activation of stop losses.

Unfavorable trading conditions

Some brokers impose unfavorable trading conditions, such as a minimum stop level, the smallest allowable distance from the current market price, where you can place pending orders, stop losses, or take profits. This can be problematic for straddle strategies in CFD trading, which rely on pending order utilization. A large minimum stop level forces traders to set the price of their pending orders further away than intended, increasing the risk of late entries, higher exposure to whipsaws, or a less favorable risk-reward ratio.

Tips when using the straddle strategy 

• Check the economic calendar: Always review the economic calendar to identify scheduled events that could cause significant market movement. Prepare at least 45-60 minutes in advance.

• Set appropriate pending orders: Place your buy stop and sell stop orders just outside key support and resistance levels, or just beyond the recent trading range, to catch a breakout.

• Manage risk with stop losses: Always set a stop loss to limit potential losses. Many traders use a stop loss twice the size of the range between the entry price and the breakout level, which increases the risk that the strategy will fail. 

• Use a trailing stop (If available): A trailing stop can help lock in profits as the trade moves in your favor, especially when there is a strong price movement in one direction.

• Maintain a consistent risk-reward ratio: Aim for a risk-reward ratio of at least 1:2. For example, if you risk 30 pips, your take profit should aim for 60 pips.

• Avoid overtrading the strategy: Not every news event will result in a big move. Be selective and use the straddle strategy when high volatility is reasonably expected.

• Choose your broker carefully: Choose a broker that offers favorable trading conditions. Exness provides zero stop level, stable spreads, and well-defined slippage rules which are highly beneficial in minimizing slippage. Exness’ trading conditions may enhance the effectiveness of strategies like the straddle.

Key takeaways

1. A straddle strategy uses both call and put options to anticipate volatility: A long straddle involves buying both a call and a put option at the same strike price and expiry, allowing traders to potentially profit from significant price movements, regardless of direction.
2. In CFD trading, straddle positions are mimicked with pending orders: By placing a Buy Stop and Sell Stop order on either side of the current price, traders can simulate straddle positions to capitalize on expected price movements after major news events.
3. The strategy depends on price breaking out, not just fluctuating: Traders must identify key levels where price movements are likely to occur and place orders outside that range. This is essential for the strategy to work effectively during high-impact market events
4. Profit potential rises when the market increases volatility post-news: Straddle strategies are most effective when the market increases its momentum after events like CPI releases or central bank decisions, leading to sharp price movements in one direction.

Final thoughts

The straddle strategy is a powerful approach in CFD trading, particularly during periods of heightened market uncertainty and volatility. By placing both buy stop and sell stop orders around key levels, traders can position themselves to capture significant price movements, regardless of direction. This makes it an attractive option for events like major news releases or economic data announcements.

However, it’s important to recognize that the straddle strategy is not without risks. Factors such as whipsaws, mixed data scenarios, slippage, widened spreads, and restrictive broker conditions like minimum stop levels can impact its effectiveness. As with any trading strategy, careful risk management, preparation, and discipline are essential to achieving consistent results.

For traders looking to implement this strategy, choosing the right broker plays a crucial role. A broker like Exness, with its zero stop level, stable spreads, and clear slippage rules, provides favorable trading conditions that can enhance the success of straddle strategies in the CFD market. 

In conclusion, while the straddle strategy offers significant profit potential in volatile markets, it requires a well-planned approach, careful execution, and a solid understanding of market conditions. With the right tools and mindset, traders can make the most of this strategy and navigate uncertainty with greater confidence.