Trading Channels – Forex Academy

Introduction

In forex, the dynamic channel trading is a profitable strategy that forms with standard trendlines. It indicates a potential move to identify the market direction both to the downside and upside. On the other hand, price action is a method to identify the price direction based on price behavior. Therefore, we can create a profitable trading strategy by reading the price action from any channel support and resistance level.

In general, traders use price channel as a technical analysis tool that helps to identify the potential market movement. The dynamic channel moves like a zigzag by creating lower lows and higher highs. In Forex trading, we usually have two types of dynamic channels:

An upward or ascending channel
Downward or descending channel

Dynamic Channel Identification

We can easily identify the dynamic channel by connecting the swing lows or swings highs they create. In an upwards dynamic channel, it will move with the price with a higher high formation.

Similarly, in a downward dynamic channel, it will move with the price by creating lower lows.

In the image above, we can see that the higher highs and the lower lows connected through straight lines. The dynamic price channel shows a significant movement from down to upside in the trend line. The trendline below the price may work as a dynamic support level, and the trendline above the price may work as a dynamic resistance level.

Besides the dynamic channel, we will use the concept of price action by measuring what buyers and sellers are doing in the market. Any slower and corrective movement from the dynamic channel support and resistance would indicate a possibility of a potential market reversal.

Later on, we will use the appropriate reversal candlestick from that area to enter a trade. In this trading strategy, we can make a profit when the price is trading within the channel, or it breaks out from the channel. However, we will filter out the unusual false movement by reading the price action.

Bullish Dynamic Channel Trading Strategy

In the bullish channel continuation trade setup, we will identify the price that is moving upside within the channel.

Identify the Price Location

Central banks and big financial institutes drive the price of a currency pair. Therefore, institutional traders focus on long timeframes mostly, as it provides the most reliable price direction. Therefore, we will move to the daily or weekly timeframe and identify the location of the price. We will consider channels that only meets the following condition:

⚠️ An upward channel should move within an uptrend above a key support level.

Entry

In an upside movement of a price channel, there will be new higher highs. Therefore, we need to identify a price channel where the price moves down towards channel support with a corrective speed. We will enter the trade as soon as the price rejects the channel support with a reversal candlestick formation.

Stop Loss

In a bullish channel trading, the stop loss would be below the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary aim of the taking profit would be the immediate channel resistance. However, we have to read the price action to make a trading decision regarding the take profit.

If the price starts to move with an impulsive bullish pressure, it can go beyond the channel resistance. In that case, we can take some partial closing 10-15 pips below the channel resistance and wait for the price to test any event level.

Bearish Dynamic Channel Trading Strategy

In the bearish channel continuation trade setup, we will identify the price that is moving downside within the channel.

Identify the Price Location

Based on the price action context, we will move to the daily or weekly timeframe and identify the price’s location. We will consider channels that only meets the following conditions:

⚠️ A downward channel should move within a downtrend from a key resistance level.

Entry

In the downward price channel, there will be lower lows. Therefore, we need to identify a price channel where the price is moving down towards a channel resistance with a corrective speed. Therefore, we will read the price action and enter the trade as soon as it rejects the channel resistance with a reversal candlestick pattern.

Stop Loss

In the bearish channel trading, the stop loss would be above the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary aim of the taking profit would be the immediate channel support. However, we have to read the price action to make a trading decision regarding the take profit.

If the price starts to move with an impulsive bearish pressure, it can go beyond the channel support. In that case, we can take some partial closing 10-15 pips above the channel support and close the rest of the amount at the next event level.

Channel Breakout Trading Strategy

In forex trading, when the price crossed (above or below) the channel, there is a profitable trading strategy. For making the trade sustainable, we need to identify the speed of the breakout. When institutions or banks enter the market, we see such massive breakout from the channel support or resistance.

Entry

After a massive breakout from a dynamic channel, we will wait for a correction. The correction indicates that the massive breakout would be strong. We will wait until the price moves to the channel support or resistance level with a corrective speed and enter the trade as soon as it rejects the level with a reversal candlestick formation.

Stop Loss

Setting a stop loss is similar to the channel continuation trade setup. You can put your stop loss above or below the reversal candlestick with 10 to 15 pips buffer.

Take Profit

The primary target of the channel breakout is the immediate event level. However, you can extend the take profit by reading the price action. If the power of the breakout is strong, the price may move beyond the immediate event level.

Conclusion

The Forex market is a competitive trading market where trade management is a key element for a forex trader. No trading strategy can assure you a confirmed profit. Therefore, it is recommended to use not more than 2% risk per trade and move the stop-loss at breakeven as soon as the price creates new lows or highs.

Introduction

One of the most important characteristics of price in the Forex market is that it moves in the form of channels 20-25% of the time. So it is crucial to learn how to trade the market when it is in this state. The price channel strategy that we are going to discuss is intuitive and most straightforward. In this article, we will see how to implement this strategy and take profitable trades while reducing risk at the same time. Let’s get right into it.

What is the price channel pattern?

Before exploring the strategy, we need to know what a price channel means and the different types of channels. The price channel represents two trend lines drawn above (channel resistance) and below (channel support) the price. The price moves within these two trend lines.

The width of the channel should be big enough if you want to trade inside it. In this case, a simple trade would be to buy at channel support and sell at the channel resistance level.

However, the most significant opportunity is to trade the channel breakout.

We can distinguish the channel into two types:

Upward price channel
Downward price channel

An upward price channel occurs when price makes higher highs and higher lows. More the number of touches the price makes to channel’s support and resistance, stronger is the channel.

A downward price channel occurs when the price makes a series of lower lows and lower highs. The trend line should be able to connect to these points; only then we can call it a channel.

This represents the consolidation or ranging zone. Here the market bounces on and off between the two support and resistance lines.

If you understand the psychology and reason behind the formation of a price channel, it can save you a lot of losing trades. The reason why channel breakout is so significant is that many traders trade inside the channel. They place their stop loss above or below the price channel pattern.

As more and more traders start placing their stops, they will eventually be targeted by smart money. One needs to remember that a price channel won’t last forever. Breakout in any form is inevitable.

So, now, let’s see what the price channel strategy is and how to trade it effectively. This strategy is independent of technical indicators and does not make use of it (except for taking profits). Hence, there is no prior knowledge of technical indicators is required.

Price channel strategy

Recognize the early signs of a price channel breakout, as this will help you make better decisions. This strategy is based on such breakout signs, so knowing about them in advance is an advantage.

Here are the various steps involved in the strategy. We will be taking the example of a sell trade.

Step 1: Draw an upward channel

The upward channel should be constructed in such a way that it should connect at least two higher highs and higher lows. You can also make use of the price channel tool, which is provided by most trading platforms to connect the highs and lows.

Before the breakout, we need to make sure of an important rule, which brings us to the next step.

Step 2: For an upward channel, look for a false breakout above the channel resistance.

In the case of an upward channel, the first warning would be the price failing at the resistance and giving a false indication that the price has broken above resistance.

Only this strategy makes use of this powerful price reading technique. It is in this unique style that we have developed this strategy. The failed attempt at the top is a sign of ‘stop-loss hunt’ by large players, which is confirmed when the price comes back to the channel support.

Note – The more times a ‘swing high‘ tries to get violated and fails, the stronger will be the breakdown.

Step 3: Wait for the breakdown and confirmation

A mistake that most traders do is that they don’t wait for a confirmation signal after the breakdown happens. For this strategy, the confirmation is to wait for the breakdown candle to close below the channel support. Before this, wait for the breakdown and then look for confirmation.

The closing of the candle should be like one in the below figure.

So, don’t just sell after the support is broken. Instead, see that the breakdown candle closes below the price channel. This is an effortless way to avoid false breakdown signals.

Note – If the breakdown candle is decisive, it’s good, but not mandatory.

Then what is the exact point of entry? This brings us to the fourth step of the strategy.

Step 4: Sell right at the closing candle

The entry technique of the strategy is quite simple. A sell order can be executed at the breakdown candle closing price.

Now you can be confident in taking the trade, as you have done everything right until now. The next logical thing to do is to determine where to take profits and place the protective stops.

Step 5: Take 50% profit at consolidation near EMA and rest 50% after price crosses above the EMA. The stop loss has to be placed above the channel support.

We will be taking profits based on EMA plotted on our chart. Our first potential take profit zone is when the price starts to consolidate near the EMA and touches the line multiple times, as this means that the trend might be coming to an end.

The second potential take profit zone is when the price crosses above the EMA, signaling a reversal of the current trend.

Next, we need to establish our stop-loss.

The stop-loss is placed right above the price channel support, which was broken. Stop-loss can also be extended up to price channel resistance to give more room for the price.

Finally, the trade would look something like in the below figure. This trade will result in a risk to reward ratio of 1:1 minimum. However, if you are patient enough to wait for the trend to continue, the RRR can be increased.

Note – The above trade is an example of a sell trade. The same rules apply for a ‘buy trade,’ but in reverse, as this time, you will be using a downward price channel.

Bottom Line

The price channel strategy can be used in any kind of market. It can also be incorporated into your current strategy to bring a new dimension to price action trading. If you are good at spotting price patterns and money management, this strategy can make huge profits. Happy Trading!