Forex Channel Trading Strategy

Explained With Examples

By Tim Morris - November 5, 2017

Forex Channel Trading Strategy

Price charts often look like a chaotic mess. A code that takes
forever to decipher. And this is often true, especially for new
traders with untrained eyes. However, for traders who have had
enough chart time, forex charts at times reveal an orderly
pattern amidst the chaos.

Take this chart for example.

:
Newbies, often see this chart and wouldn’t have an idea what to
do with it. Some would have an idea that this is a bullish
trending chart, but still wouldn’t have a clue on how to trade it.
But a few who have observed charts for quite some time would
see a major support and resistance forming a channel.

Moreover, they would see resistances where price broke-out to

:
resume the uptrend.

To them, the chart has become an orderly and predictable

market, which increases their confidence in trading their setups,
and increasing their chances of having a profitable trade.

Trading channels is not as complicated as it sounds. It all starts

with identifying major supports and resistances. However,
instead of horizontal supports and resistances, what commonly
takes place are diagonal supports and resistances. To qualify as
a support or resistance, price must respect the identified
support or resistance twice, and confirmed by a third swing high
or swing low.

The resulting support and resistance should be parallel to each

other to be considered as a channel, with the resistance as the
upper bounds of the channel and the support as the lower
bounds of the channel.

Once the channel is identified, it would be easy to notice how

price bounces up and down the price chart traveling from the
:
support to the resistance, then back to the support, repeatedly.
This becomes an orderly chart, which is somehow easier to
predict.

How to Effectively Trade Channels

Within the channel, price would have minor diagonal supports
and resistances, often forming minor patterns or even minor
channels, which become more visible on the lower timeframes.

~ H1 0.88400
0.88377
0.88405 0.83379 EURGBP.m,

0.89190
0.89305

-
0.89075

Flag Expanding
|
or Bull Flag Channel Descending 0.88730
0.88615

0.88379
or Bull Flag Wedge
0.88270

- 0.87925

0.87810

1 0.87700
Oct 08:00
27 28 28
2 Sep2
29 Sep 29
3 Sep 3 2017
Sep 4 SepOct
4 5
Oct 08:00
Oct
5 Oct
20:00 08:00
Oct 20:00
Oct 08:00 20:00Oct 08:00 20:00 08:00 20:00 20:00 0.87585

Patterns are well and good, they could serve as an additional

confluence or rationale for taking the trade. However, their use
ends there, an additional confidence booster for the trading
setup. What is important is the support or resistance where the
trade should breakout from.

To identify which direction the trade should take, we should first

identify if the channel is bullish or bearish. In this case, the
chart is a bullish trending channel. Since, this is a bullish
trending channel, what we will be looking for are bounces off the
channel’s support, and breakouts from the minor resistances.
:
We could therefore, forego the other markings on the chart and
consider only the channel, and the minor resistances for the
trade setup.

~ H1 1 0.88400
0.88405
0.88362
0.83370 EURGBP.m,
0.89400
0.89275

- 0.89155

0.88910

•
0.88545

0.88370
•

0.88180

-
0.87935
- 0.87810

0.87570

0.87445
Oct 04:00
27 28 28
2 29
Sep2 Sep 29
3 Sep Sep
3 2017 4 SepOct
4 5
Oct Oct
516:00
04:00 Oct 04:00
16:00
Oct Oct 04:00
16:00 Oct 16:00
04:00 16:00
04:00 16:00

The Trade Setup: Entry, Stop Loss and

Take ProAt
Since this is an uptrend, what we will be analyzing is a buy
setup.

Entry: To enter a trade, a breakout from the minor resistance

should occur. A retest would also be a helpful confirmation of the
trade as this increases the probability of a real breakout. Entries
could either be a buy stop order on top of the high of the
breakout candle, or a market buy order on the retest.

Stop Loss: The stop loss should be placed on the minor swing
low, which is often below the channel’s support.

Take Profit: The take profit should be set at the corresponding

upper end of the channel perpendicular to the entry candle. This
:
is because it would be hard to predict where price will stop since
we
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Also, there are times when price would just be near the
channel’s resistance, but wouldn’t touch it.

~ H1 - 0.88400
0.88405
0.88362 0.83399 EURGBP.m,

- 0.89155

0.88915
Take Profit
-

0.88675

0.88555

. - 0884
35 Entry
0.88315 0.88399

0.88195

-
StopLoss 0.88075

0.87955

•
0.87835
0.87715

0.87595

- 05:00
5 Oct
27 28 2
28 Sep229 Sep 29 Sep Sep
2017 4 SepOct
4 Oct 17:00
05:00
5 Oct 05:00
17:00
Oct Oct 05:00
17:00 11:00 Oct 17:00 17:00
05:00 17:00 0.87475

Conclusion
Trading channels is a basic skill thatNow
Trade many professional traders
use. This might be due to how the setups become orderly,
despite the chaos of the market, which increases confidence in
the trading setups.
Trade Now

The confluence of a bullish channel, a breakout from a minor

support, and often a bullish continuation chart pattern,
increases the probability of a successful trade. Other indicators
could also support as confluence for a channel trading setup.

However, there are times when a trade setup is formed from a

contraction, instead of a retracement. Expanding flags and
rectangles are often found during contractions, while bull flags,
pennants, and wedges are often found on retracements. I prefer
:
trading retracements as it is easier to predict and since
breakouts are clearer.

Channel trading is not perfect. There are still some failed trades
when using channel trading. However, when combined with
other strategies and confluences, setups become high
probability setups.

Tim Morris
https://www.forexmt4indicators.com/
Tim Morris is a work from home dad, home-based forex trader, writer and
blogger by passion. He likes to research and share the latest forex trading
strategies and forex indicators on ForexMT4Indicators.com. His passion is
to let everyone to be able to learn and download different types of forex
trading strategies and mt4/mt5 indicators at ForexMT4Indicators.com

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