With certain assumptions, it can be argued that any price movement in the foreign exchange market is part of one or another channel. Everything depends on the timeframe the channel was built on. This feature of price movement is a basis of all channel strategies.
Forex channels are actually self-contained, and you can trade even without the use of additional tools. But most often a number of confirmations of the received signals are used – for example, the Fibonacci retracement levels, candlestick analysis, divergences on MACD. Depending on how many additional signals are obtained, you can, for example, adjust the size of the working lot.
Forex channel strategy provides only 2 scenarios: either the price rebounds from the boundary, or breaks it through. Different trading systems offer a variety of criteria of the rebound and the breakdown of the channel – respectively, the rules to enter the market differ as well. Also of great importance is what type of channel is used in the trading strategy.
Forex channel strategy: types of channels and their features
Any trading terminal allows using several channels:
- equidistant channels;
- Fibonacci channels;
- linear regression channel;
- standard deviation channel;
- moving averages that are shifted along the Y axis can also be used as the boundaries of the channel.
An equidistant channel can be considered the most common type. Despite the simplicity of the construction, it is highly effective. In order to construct an equidistant channel, you must have 3 points (extremes on the price chart). A baseline is drawn after 2 highs/lows, and the opposite boundary of the channel is drawn through the third point. Forex channel strategy using this type of channels shows good results.
Fibonacci Channels. Just like in the equidistant channel, the main channel line is drawn, but after the opposite boundary of the channel the parallel lines are built at a distance of 0,618; 1,0; 1,618 and 2,618. In addition, the trader can specify additional lines parallel to the channel at an arbitrary distance from its boundaries.
A linear regression channel: to construct it, the trader just needs to allocate a certain portion of the chart, and the channel will be built automatically. The distance from the center line to the channel boundaries is the maximum distance from the closing price to the center line.
A standard deviation channel is similar to the linear regression channel. But in this case, the distance between the center line and the boundaries of the channel corresponds to the standard deviation of the closing price from it. The position of the price relative to the central line can tell about the mood of the market.
Features of work with the channel strategy
Any Forex channel strategy requires strict criteria for the price breakthrough and rebound from the boundaries of the channel. It is at this stage that most beginners make serious mistakes. As a rule, they take a chart touching the boundary of the channel for a rebound, and a small "puncture" of the channel – for a breakthrough. Of course, lucrative trading is impossible with such approach.
You can talk about the rebound from the boundary of the channel only after the candle is closed which touched the boundaries. The significance of the received signal is increased if a rebound is accompanied by a reversal candlestick combination (for example, bullish/bearish engulfing) and divergence on the indicator.
As for the breakthrough of the channel, there are 2 ways of trading in this case. You can try to take a chance and enter the market at the moment of the channel breakthrough – this approach is considered risky. It is much more reliable to wait for a small pullback after the rapid breakdown and make a deal at the retest of the broken channel. If the retest coincides with the Fibonacci correction, the signal strength increases.
Example of making a deal using the channel strategy
In this example, the price within a month was moving inside the descending channel (built on h4). During this movement, you can select a number of channels of lower rank on a smaller timeframe, which can also be used for trading. MACD indicator was used to find divergences with standard settings.
Any Forex channel strategy begins with the construction of the channel and track of the prices behavior within it. Building several channels at shorter time intervals will also be useful. Then you need to keep track of the price behavior near the boundary of the channel. It must be remembered that the priority is given to the signals received on the larger timeframe.
If the price touched the channel and closed within it, there is a chance of rebound. You can enter the market if you got at least 1-2 confirming signals (divergence, candlestick combination). SL level is recommended to set behind the closest extreme. In this case, the ratio of SL to TP must be at least 1: 2, 1: 3.
In this example, there eventually was the breakthrough of the channel. If the trader adhered to the conservative method of trading, they would have been able to make a successful deal on the retest of the broken channel. The validity of this breakthrough is confirmed by the fact that the retest coincided with the level of correction of 38.2% from the last upward movement.
Nuances of working using the channel strategy
The main disadvantage of channel strategies include some subjectivity in the building of the channel and the absence of generally accepted criteria of breakthrough and rebound. To build the channel, you need only 3 extremes on the chart, but each trader selects different extremes. Besides, the channels are often adjusted, which also affects the results of trading.
Despite the lack of generally accepted criteria of the rebound or breakthrough of the channel, it is recommended to pay attention to the price behavior at the boundary of the channel:
- if the channel breakthrough occurred in one breath, within 1-2 candles, there is a high probability that it is valid. However, it is still recommended to wait for retest of the channel;
- if the price doesn’t move in the right direction after the rebound from the boundary of the channel, then it is recommended to move the deal at least to a breakeven;
- it is recommended to make deals in the direction of the trend on a larger timeframe.
Forex channel strategy is also interesting because over time it doesn’t lose its efficiency, as it happens, for example, with indicator strategies. All you need for profitable trading is strict adherence to rules and competent selection of supporting instruments. Source: DewinforexSocial button for Joomla