Price channels are useful technical analysis tools that help you tell the market trend.
Besides that, they also offer you a foundation on which you can build your other technical analysis tools. And with the right strategies, you can squeeze out some effective trading opportunities from them.
In this article, you’ll learn some useful price channel trading strategies and some handy tips to help you maximize your advantage.
3 Price Channel Trading Strategies
When you come across those channels, here are some strategies to help you trade them:
1. Channel Trend Trading Strategy
The first, and possibly the most popular, way to trade channels is during trending markets. It is the preferred strategy for many forex traders because of its simplicity. The price channel trend trading strategy helps you take advantage of a trending market by telling you the best positions to get in on the trend.
You can trade this strategy by scouting for trade opportunities in the direction the channel slopes. You buy when the channel slopes upwards, and sell when the channel slopes downwards.
In an uptrend setup, you wait till the price sinks to the support line of the channel before making your order. And when in a downtrend setup, you wait till the price floats to the resistance line of the channel before making your order.
Because you never know when the price might break out of the channel, it is best to combine this trading strategy with other forex trading tools. For instance, you could use the volume indicator to measure how much buying or selling pressure is on the market before you trade, You could also use confirmation candles to confirm the direction of the price.
2. Price Channel Breakout Trading Strategy
This channel trading strategy helps you take advantage of a breakout when the volatility of the forex market makes the price break out of a channel.
Often, you’ll see a strong candle that crosses to the other side of your channel, signifying the potential end of the channel. And the longer a channel lasts, the more likely it is to see a breakout soon. So, how do you trade the channel breakout trading strategy?
When trading this strategy, the first thing to look out for is the breakout candle. If you’re an aggressive forex trader, this is a clear signal to trade the breakout. You buy or sell at the closing of the breakout candlestick.
However, the risk attached to trading the first breakout candle is very high, as there’s no way to be certain it isn't a false breakout. And if you must make a trade now, learn how to deal with false breakouts.
The next trading opportunity comes when the price retests the channel after the breakout. This is a more conservative and less risky trading strategy, as waiting for the retest helps you confirm that the price has fully broken out of the channel.
There are times, like in the chart above, where the price doesn’t retrace to the channel. Instead, it forms a support level from which it retraces. You can also make your orders on the level. You can check out our article that teaches you how to trade breakouts and retests.
3. Price Channel Consolidation Trading Strategy
Channels not only form in trending markets. They also form in ranging markets, thereby offering you more trading opportunities. The interesting thing about this channel consolidation trading strategy is that you can buy or sell without fear of going against a major trend.
However, this advantage makes it riskier and less profitable because there are rarely any big movements within consolidations when compared to trends.
You can easily trade the channel consolidation strategy by buying when the price sinks to the bottom of the channel and selling when the price floats to the top of the channel.
Tips on Trading Channels in Forex
It is easy to get it wrong with channels even after you master those strategies. This is often because of a trader’s failure to follow some basic rules such as these:
1. Draw your channels properly
Drawing your channel properly is the first and most important key to getting the price channels forex trading strategies right. Otherwise, your channel could be telling you that the price is still within it when in fact, a breakout is happening.
When drawing your channels, ensure you’re not forcing the lines of your channel to touch any candlestick. Also, make sure your channels are not squeezing the candlesticks too tightly. The FXSSI auto trend channels indicator can come in handy in helping you mark out proper forex channels.
2. Don’t wait for perfect setups
A mistake many novice traders make is to wait for perfect channel setups before making trades. But perfect channels where all the lines touch the candlesticks at the tips rarely happen. Instead, what you’ll most often see is the price getting very close to the lines of the channel but not touching it.
You may also find a candlestick or two slightly shooting out of the channel. In situations like these, any of the channel trading strategies up there still holds.
3. Never trade without proper risk management
The usual risk management tips apply here. Never risk more than you're willing to lose. Always use stop losses even if you forget to take profits. Don’t get greedy. Eliminate emotions from your trading.
By now, we hope you’re familiar with the channel trading strategies enough to try them out on your demo account. You can also combine any of the strategies with other strategies in your trading system and see how it affects your results. But remember to not implement the strategies on a live trading account until you are sure you’ve got a hang of it.