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4 WAYS TO TRADE A CHANNEL

By Galen Woods in Trading Articles on December 25, 2013
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Do you trade with a channel? There are dozens of channel for trading including linear regression
channel, moving average channel, and trend line channel.
Regardless of your favorite channel tool, there are 4 ways to trade them. Let’s learn about them to
make the most out of your trading channel.
TRADING TRENDS WITH CHANNELS

This is a trend trading strategy. To use this trading method, you must have a channel that is sloping
at a healthy angle to confirm that the market is trending.
A trend line channel is the perfect tool for this trading method.
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4 Ways to Trade a Channel - Trading Setups Review https://www.tradingsetupsreview.com/4-ways-trade-channel/
Let’s go through this channel trading example.
1. We drew a trend line with two swing highs. The trend line was sloping downwards.
2. Then, we drew a parallel line starting with the swing low to complete the channel.
3. Prices went up to test the trend line, which is also at the level of a previous congestion area.
Hence, the context was excellent for a bear trade, so we went short with the bearish inside bar.
4. The channel trend line provided the perfect price target for this trend trade.
We could have taken the short trade using only the trend line. However, having the channel gave us
a clear exit point for this trade.
To learn more about trading trends with trend line channels, read Channel Surfing: Riding the Waves
of Channels to Profitable Trading.
TRADING REVERSALS WITH CHANNELS

When price exceeds the channel trend line, it could be a climatic move, implying that the trend has
exhausted itself. We can then look out for reversal trades like the one below.
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Reversal trades are usually low probability trades so we must select only the best trades. Follow
these rules to find the best reversal trades.
Ensure that the channel is going against the trend of the higher time-frame. Effectively, you are
looking for a retracement of a larger, more powerful trend.
Trade reversals with steep channels. Steep channels are unsustainable.
Strong rejection of break-out of channel trend line. (like the outside bar in the example above)
TRADING RANGES WITH CHANNELS

Channels are not just for trending markets. They are also useful in highlighting range-bound trades.
In horizontal channels, we can trade without directional bias. We can sell short at the top of the
channel and buy at the bottom.
The Gimmee bar trading setup is an example of trading ranges with channels. However, in the
Gimmee bar strategy, the Bollinger Bands acted as the channel.
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Read our review of the Gimmee bar trading setup to learn more.
TRADING BREAK-OUTS WITH CHANNELS

The earlier strategies assume that the channel will contain price action and seek to buy low, sell
high. What if this assumption fail?
Then, we might have a break-out trading setup that often offers quick profits. However, judging
which break-outs are valid is an art that is hard to master.
Pay attention to volume. Valid breakouts are strong with increased volume.
Look out for break-out bars with above average bar range. (Read Yum-Yum continuation
pattern.)
For trading strategies that finds break-outs with channels, take a look at:
Quick Trade using Linear Regression Channel – A classic example of a break-out trade.
A Simple Day Trading Strategy – It uses MACD to confirm the breakout of Bollinger Bands.
MAKE THE MOST OUT OF TRADING CHANNELS

Channels are powerful trading tools that highlight trading opportunities for all 4 types of basic trade
setups.
However, for some traders, having too much trading options is a drawback. They look for trading
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direction. For indicator-type channels, you can increase both the look-back period setting and the
deviation setting to create a larger channel to contain long-term price action.
Let’s go channel surfing.
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Perfectly structured with step-by-step guides to help you understand the principles of price
action analysis.
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Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all
or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security
or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider
trading. Past performance is not necessarily indicative of future results.
The website contents are only for educational purposes. All trades are random examples selected to present the
trading setups and are not real trades. All trademarks belong to their respective owners. We are not registered with
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