Channel Trading Strategies

Quick Guide

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Channel trading can be a great way to find support and resistance areas and
potential breakout trades.

When channel trading, we are trading a channel as it forms and bounces or breaks
through the previous channels levels.

In this post, we discuss exactly what channel trading is and the best strategies to
use it.

What is Channel Trading?

When trading a channel, you use parallel lines connecting the swing highs and
swing lows of a market's support and resistance.

The most common method to mark a channel is by using trendlines.

The swing highs that are marked by the trendline are known as the channel's
resistance levels. The swing lows that are connected to create the channel become
the support level.

As discussed below, these levels can then be used to find ‘bounce’ trades and
breakouts.

Trading the price channel is a very popular method of technical analysis because
you can use it on all time frames and in many markets, including stocks and Forex.

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You can use a channel to find support and resistance as the price continues to move
higher or lower, and you can use it to find potential breakout trades.

Channel Trading Strategies

Whilst there are other strategies that are used with channels such as the break and
retest and the horizontal strategy, four popular strategies are;

● Ascending Channel Trading Strategy

● Descending Channel Strategy
● Channel Breakout Strategy

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 ● False Breakout Channel Strategy

Ascending Channel Trading

An ascending channel is where the price is moving higher.

With this channel, price is making higher highs and higher lows.

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The easiest way to take advantage of this type of channel is by first identifying the
trend higher and the channel.

Once you have done this, you can begin to look for both long and short trades
depending on how aggressive you are.

The higher probability trades are always with the trend. This means looking to take
long trades from the support of the channel when the price moves into the low.

Aggressive traders may look to trade against the trend when the price moves into
the resistance of the channel and for the price to move back lower.

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Descending Channel Trading

A descending channel is when the price is moving lower.

With this type of channel, price is making a series of lower highs and lower lows
that you will be able to connect with your trendlines.

The two ways you could look to trade the descending channel depend on how
aggressive you are.

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If you are a trend trader looking to put the odds in your favor, you may look to go
short when the price moves higher and back into the resistance of the channel. This
would then be trading in line with the trend lower.

If you are more aggressive, you may consider looking to trade against the trend and
look for long bullish trades when the price moves into the channel's support level.

Channel Breakout Strategy

This is a very popular channel trading strategy.

With this strategy, you are looking for the channel to break and take advantage of
the possible explosive momentum.

As the example shows below, the price holds the ascending breakout before finally
making a strong breakout higher.

Importantly price also made a strong close above the upper trendline area.

When the price moved back lower, you will also note that this old channel level held
as a new support level.

One other thing to note is that the longer the channel holds, the stronger the
breakout will be when it occurs.

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False Breakout Channel Trading

Channel levels will regularly false break.

You will often see price pop above or below the channel support or resistance
before snapping back in the opposite direction right back into the channel.

This gives you an opportunity if you are a false break trader.

As the example shows below, the price was in a channel moving lower.

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The price tested the resistance of the channel before popping out just higher. It
then snapped back lower, forming a bearish engulfing bar to signal a potential false
break and lower prices.

Just like in this example, you can use your Japanese candlesticks when looking for
potential channel trade entries.

Price Action Channel Indicators in MT4 & MT5

To start channel trading in your MT4 and MT5 charts is very straightforward.

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Simply follow these steps;

● Open your MT4 or MT5 charts.

● Select ‘insert’ > ‘indicators’ > ‘lines’ > ‘trendlines’.
● Select the first high or low you would like to mark your trendline with your
computer mouse. Drag the trendline until you are happy with how it is
positioned on your chart.
● Repeat this last step to create the second part of the channel.

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