Folks, I cant stress it enough to you how beneficial it is to keep your head in charts and ponder trading because that is how you come up with some truly clever ideas for your trading (how do you think I came up with most of the stuff I talk about?). This is especially true after loosing trades - "there is no such thing as a failure (or a loss) if you're learned something from it" (that week I sure got my money's worth - use this philosophy when you experience a significant loss too, that's why I'm telling you about all this fluff stuff) This chapter will elaborate upon just one of the many concepts that I came up with that week. The concept isn't unique I'm sure (actually it is not unique, but nobody told me about it - some of you "expert" traders will likely think nothing of it), but I've never been taught or heard about it, and so chances are that this will be a new idea for you too.
I had a beer with a friend arguing over the stupidity of trading without a stop loss set for ALL trades. He was making arguments that supported trading without stops (in my opinion they were invalid) while I kept pointing out the folly of that idea. Several hours later I realized that trading without stops (since he got me thinking about the subject) could in fact be a solution to one of the trading problems I had been pondering about how to solve for some time. I immediately back tested the idea, tried it live successfully, and have now added it as a part of my trading toolbox. I call this technique the "Netless Straddle" Technique and yes it involves trading without a stop loss! Yeah I know I keep shouting loudly to never trade without a stop, but as the cliche goes, "never say never", because now I’ll have to eat my own words and say that there is one logical technique for trading without a stop loss set... and here it is.
This idea has progressed through several evolutions (getting better each time), and has spawned several variations, which you'll learn shortly.
"Netless Straddle Trading" isn't really a trading "Opportunity" but rather is a trading tool to be used in conjunction with certain types of "Opportunities". I've put this here, before dealing with the "Opportunities" presented in this article because this concept will be useful for a couple of situations that will soon be explained.
REGULAR STRADDLES
There are a number of variations of how traders use a common technique known as "straddle hading", but here is a common scenario. Lets say you have found a sideways moving consolidation (a.k.a. sideways channel). You have learned from me that the best way to trade a consolidation is to jump on a surfable wave after it breaks out of the channel, but sometimes you can’t sit around your computer waiting for that to happen so you use a traditional straddle. With a traditional straddle you simply place an entry order on both sides of the channel (one to go long at the top of the channel, the other to go short at the bottom of the channel). Typically your stop loss is set at the opposite side of the channel.
What should happen, in theory, is that the price should eventually break out of the channel consolidation (which inevitably it does) and (hopefully) the price should continue trending for a while in that direction.
Using this basic straddle method as described above will often yield you some nice profits, however there is a downside to that technique. Sometimes (often enough to become rather annoying) the price will move up enough through the horizontal channel line to trigger you into a trade, then it either continues to move up but not sufficiently to trigger your limit exit order or it just comes back down immediately back into the range of the consolidation. Then the price continues to move down through the consolidation to the other side of it until it exits your first trade for a loss AND simultaneously enters you into the second trade going in the opposite direction. If it continues trending in this new direction then hopefully you could simply exit the trade when it moves profitably far enough to at least break even with your first trade, or preferably even further so that you at least have some profit at the end of this experience. The real kick in the pants happens when the second trade also turns around, goes through the consolidation channel range and reaches the other side triggering your stop loss. When this happens you become a two-time looser (this is what happened to me in that loosing trade I mentioned above).
To help you to understand lets give a numerical example of this. Lets say you have a consolidation of 50 pips (lets use round easy numbers for this example). You find that the top of the channel is at 1.2200 and the bottom is at 1.2150. You then place two entry orders. The first order has an entry of 1.2200 to go long, a stop at 1.2150, and a limit at 1.2250. The second order has an entry of 1.2150 to go short, a stop at 1.2200, and a limit at 1.2100. Then you wait for something to happen. Lets say the price moves up through the channel and hits 1.2200. Your trade is now entered and you have a long position. The price inches up to 1.2240 (oh so very close to your profit limit) but unfortunately turns around and plunges down. Quickly it moves through the channel zone until it arrives at the other side. Simultaneously two things happen (1) your original trade now exits for a 50 pip loss and (2) you are now entered into a new trade going in the other direction. It goes down a bit more until it too turns around racing back upwards. Shortly it crosses over 1.2200 again resulting in your second trade exiting for a loss of 50 pips. So your net result is two loosing trades totaling 100 pips lost. (Note: The above example shows using limit exit orders but many traders don't use them to allow profits to run. Whether you'd have used them or not in the above example wouldn't affect the end result.)
In all fairness the above worst-case scenario doesn't always happen. Many traders do use straddles profitably (as have I), but what if there was a way to minimize that potential downside described above while simultaneously allowing you to let profits run even further without limits.
Source: Forex Sailing
