Written By Walker England , Trading Instructor
Article Summary: Creating a Forex trading strategy does not have to be a difficult process. Today we will review the basics of trading price channels.
Somewhere between directional trend trading and range trading support and resistance levels, traders will discover trading pricing channels. Pricing channels are an exciting way to trade since they are easily recognizable on your charts, and can be just as easy to plan a trading strategy around if you know what to look for.
First, let’s learn how to find a pricing channel. This can be done by identifying and connecting a series of highs and lows on your graph. Below we can see a descending channel on the USDCHF 4Hr chart. Notice how resistance has been formed by connecting the two previous highs to form a descending trend line. Since resistance is descending, support should be descending as well as the USDCHF creates a series of lower lows. These lows should run parallel to the resistance line that was previously drawn completing the price channel pattern.
While the USDCHF graph in our example today is a descending price channel, it should be noted that channels may also rise in an uptrend and trade sideways in ranging markets.
Learn Forex – USDCHF 4Hour Trend
http://media.dailyfx.com/illustratio..._Picture_2.png (Created using Marketscope 2.0 charts)
Trading the Channel
Once a price channel has been identified, we can then take a plan of action for trading it. Trading pricing channels is much like trading a range since we will pinpoint areas of support and resistance for out entries. In a descending pricing channel entries can be set on a test of previous resistance. Traders will look to sell in this gradual downtrend and take advantage or price reaching to lower lows. It’s important to understand that trading channels is ultimately a support and resistance strategy. That means that traders will wait for their opportunity to enter the market and not trade when prices reside between these levels.
Setting entry orders to sell at resistance is the most common way of trading a descending channel. However, traders seeking further market confirmation can also employ the use of an oscillator when trading pricing channels. Traders using an oscillator will wait for their indicator of choice to return from overbought territory to sell as market momentum begins to return lower in a declining channel. Once an entry is decided upon, it will then be necessary to clarify exit options for the position.
Learn Forex – USDCHF Channel Entries
http://media.dailyfx.com/illustratio..._Picture_1.png (Created using Marketscope 2.0 charts)
Exiting Positions
Regardless of your trading strategy, traders should always have a plan to exit the market. Channel traders enjoy having clear profit targets and areas to place stop orders. In a downward sloping channel, stops should always be placed above resistance. In the event that price begins printing higher highs, traders will want to exit positions to sell the USDCHF as quickly as possible.
Profit targets can also be set by using our pricing channel. Areas to take profit can be extrapolated by extending our line of price support. Traders will want to exit on a test of support, as price may bounce back to resistance continuing our descending channel pattern.
---Written by Walker England, Trading Instructor
