A price channel is a space on a price chart enclosed between a line of highs and a line of lows within which the price moves. The channel can be ascending, descending and horizontal.
The uplink takes place in the uplink. The line drawn at the lows of prices in an ascending channel is an uptrend line. A descending channel is accompanied by a downtrend. The line drawn at the highs in the down channel is the downtrend line. A horizontal channel appears when the price moves sideways (flat). The horizontal channel is limited from below by a support line (passing through the lows), and from above by a resistance line (passing through the highs).
There are many trading strategies that use price channels. Some of these strategies are focused on trading within the channel, some of them are focused on breaking the price channel.
Building a price channel
To build a price channel, at least three points on the price chart are required, the first two should define the resistance (or support) line, and the third should be located at the local extremum farthest from this line.
Let's look at an example of building an upward price channel:
As you can see from the figure above, it took only three points to build the channel. Points 1 and 2 represent successive local minima, and point 3 is a local maximum. An uptrend line is drawn through points 1 and 2, and a line parallel to it is drawn through point 3. The space bounded by two constructed lines represents an ascending price channel.
Now let's build a downstream channel:
As you can see, the principle of its construction is exactly the same. First, a downtrend line is drawn based on two points (descending local maximums), and then a line parallel to it is drawn through the third point (the nearest local minimum).
A horizontal channel, which is a section of a trendless (flat) price movement, is built between two levels. From below, it is limited by the support level, and from above - by the resistance level.
Types of price channels and their construction in MT4
The following four types of price channels are most common among traders:
- equidistant channel
All these channels are presented in the popular MT4 trading terminal, and therefore, as they are described, I will immediately give references to how they are built there.
The Fibonacci channel involves the construction of a series of parallel lines remote from the main one (trend line or support level) at distances proportional to the coefficients of the Fibonacci sequence.
To build it, you need to set two points (by local minima or maxima) that form a trend line or level.
The linear regression channel is built by simply setting the boundaries of the interval. Just hold down the left mouse button at the beginning of the desired interval, drag to the right and release at the end of the interval you need.
The terminal itself calculates the position of the central line of the channel, placing it in such a way that it is in the center of the selected price range. The two extreme lines that form the boundaries of the channel are located at an equal distance from the central one in such a way as to capture all price values in a given interval.
The Equidistant Channel is an auxiliary tool for constructing the most common channels (ascending, descending and horizontal) according to the method described at the beginning of this section. To build it, you first specify a pair of points for the trend line (in this case, the terminal draws two channel boundaries at once, one at the specified points, the other just parallel to it). Next, you need to move this parallel line to the right place (attach it to the local extremum, according to the method described above).
The standard deviation channel is built on the same principle as the linear regression channel. It is based on the same line, built on the basis of average price values for a selected period of time. Its only difference is that the boundaries are located at a distance of one standard deviation, and therefore they may cover not all prices, but their absolute majority (about 95%).
The Metatrader4 (MT4) trading terminal allows you to build price channels using its standard set of tools. In it, you can build all the types of channels described above. All these tools are in the menu "Insert" - "Channels":
Other types of price channels
In addition to the so-called linear price channels, the boundaries of which are described by straight lines, there are also non-linear price channels. The boundaries of such channels are curves, each point of which is located at a certain (calculated) distance from the central curve, which often acts as a moving average.
The most common non-linear price channels include:
- Bollinger Bands
Bollinger bands are familiar, perhaps, to every even a novice trader. They are presented in the standard toolkit of most trading terminals. In MT4, for example, they are located here:
Bollinger Bands are three moving averages. The main moving average is based on price values and lies in the middle of the channel, while the other two are located on both sides of it at a distance equal to the specified number of standard deviations. The number of standard deviations is selected so that the channel contains about 95% of all prices.
Bollinger bands on the chart The Költner channel, in fact, is an analogue, or, if you like, a modification of the Bollinger bands. In MT4 it can be found in the custom indicators section:
Költner channel on the chart Principles of trading through price channels
Trading using price channels involves two main tactics:
- Trade within the channel
- Channel breakout trading
Trading inside the channel is based on the assumption that the boundaries of the channel represent relatively strong support and resistance levels. And this means that with a high degree of probability the price will be reflected from them, moving inside the channel. Therefore, the trading strategy within the channel involves selling when the price reaches the upper limit and buying when the price reaches the lower limit. In addition, I recommend applying the following signal filtering:
- Buy only when the price reaches the lower limit of the ascending channel
- Sell only when the price reaches the upper limit of the descending channel
- For a horizontal channel, you can buy whenever the price reaches the lower limit and sell when it reaches the upper one.
Channel break trading implies the fact that sooner or later any channel will be broken. As a rule, such a breakdown is always accompanied by a strong price movement, on which traders make their money. In order to catch this kind of breakdown, it is very convenient to use pending orders.
A pending order is placed at a certain distance outside the channel border (so that it is not knocked out by random price volatility) and is triggered automatically as soon as the price reaches it after breaking the channel border.
A linear channel, by definition, is more predictable than a non-linear channel and allows placing pending orders near its borders (which are obvious in the near future, since they are straight lines). Non-linear channels cannot boast of such predictability, and therefore they are traded mainly by market orders.
You can learn more about trading strategies for each of the described channels by clicking on the links above.
Conclusion
Price channels are an integral part of the technical analysis of the market, and their proper use can easily form the basis of a trader's trading system. After all, they are based on perhaps the most important tools of all technical analysis - support and resistance lines.
Here are some more tips for using price channels in trading:
"Bollinger Bands" are inherently an indicator largely identical to moving average envelopes. Its indicators and signals are functions of market volatility. The change of the bands depends on the direction of the trend, as well as on the speed of its movement.
The main function of this indicator is to estimate the possible duration of a short-term price change. Bollinger Waves are three bands, the location of which is influenced by the nature of the price movement. It is a convenient and effective indicator for trading in the price channel on Forex.
There is no need to download and install Bollinger Bands, since this tool is included in the standard set of indicators of the MetaTrader 4 platform.
Channel indicator trading basics
The operation of the indicator is characterized by certain trading signals:
- the continuation of the trend is characterized by the expansion of the bands, and the end of the trend causes their narrowing;
- if the price goes beyond the channel, this also serves as a signal for the continuation of the trend;
- based on the nature of the price movement in a narrow corridor, one can predict high market volatility after exiting the flat and a strong trend.
- short-term trading - 10;
- medium-term trading - 20;
- long-term trading - 50.
The middle line always serves as a resistance line, and when it is overcome, the price must reach the opposite border of the channel, which is often used by scalping fans in the Asian session.
Standard Forex channel trading strategy
It should be noted that the usual Bollinger Bands trading strategy is most relevant for traders who prefer to maximize profits in a calm market. Its basis is trading up and down relative to the channel boundaries. Using this strategy, you should start by placing the Bollinger Bands price and the Stochastic Oscillator indicator on the chart.
As a rule, the price movement occurs from one border of the Bollinger bands to another and back. It is on this that the standard channel trading strategy in the Forex market is based. The price at the upper border is a signal to enter the market and open a Sell position. Accordingly, the approach of the chart to the minimum indicates the possibility of making a “Buy” transaction.
Before opening orders, you should wait for the signals to be confirmed by the second indicator. For trading, it is most rational to use the M5 and M15 timeframes, and the width between the Bollinger bands is at least 50 points. For protection of the deposit against losses when trading in a price channel, Stop Loss is set.
With an open position to sell, the level of this stop order is located several points above the maximum price of the trading day. For a Buy order, Stop Loss is set 3-4 points below the low price of the current trading day.
Aggressive trading option in the price channel
The main feature of this strategy is the possibility of a significant increase in potential profits by making a large number of transactions in a relatively short time period. A trader trades on 5- and 15-minute timeframes strictly within the boundaries of the bands, without taking into account the direction of the global trend.
The first Buy order is opened when the price is at the lower border of the indicator band. In this case, the stop loss should be set 3-4 points below the formed local minimum. After the price has crossed the middle line, this order is placed a few pips below it. This technique will allow you to automatically close the deal with a profit during a rollback.
A small digression. Two more effective trading methods:
If the price, having rolled back, crosses the middle line again, a second buy order is opened. This should be done after passing the formed local minimum. Stop loss in this case is placed just below the middle Bollinger band. In situations where the price continues to move upward, two options are possible, namely:
- the chart crosses the resistance level (the stop loss is moved to this line);
- rebound - taking into account the readings of the Stochastic, a Buy order is closed and a Sell order is opened.
Traditional price channel trading strategy is currently one of the most popular and is widely used by both beginners and professional traders. It is in this system that the basic rule of the market is implemented - "Buy low, sell high." It should be noted that such an approach to trading is most effective when the price moves sideways and is absolutely not suitable for a downtrend and an uptrend.
The main advantage of an aggressive strategy is the possibility of obtaining a sufficiently large profit with a minimum initial capital, however, it is associated with a high risk of losing a deposit. Regardless of the chosen trading strategy, Bollinger Bands should be used in conjunction with other indicators, including: Stochastic Oscillator, as well as MACD and ADX.
Have you ever participated in real races? The Forex channel strategy "Racer" will allow you to win in any exchange trading competition, as it is a two-time winner of trader battles held at one of the foreign forex forums. Therefore, if you are thinking about how to get profit on Forex in the most efficient way, this strategy will easily provide it for you!
Trading in channels using the Forex "Racer" strategy
So, in our forex channel strategy, a channel built from Moving Average indicators is used, and the trader receives signals for entering the market at the moment the price exits the flat at the beginning of a new trend. That is, at the most optimal moment. It remains only to catch this signal and make a deal on it! And the profit on Forex will not keep you waiting long. Just below you can download the template of this Forex channel strategy and the indicators used in it. In the meantime, let's continue to consider the rules of this trading system. After installing the template, you will get the following asset chart:
And the conclusion of transactions according to the specified template is carried out in the following way.
How to get profit in Forex using a channel strategy
So, after installing the template, we turn our attention to the quotes chart. As you can see, there is a channel on it, formed from two moving averages, and the yellow moving average crosses the indicated channel, first in one direction, then in the other. The trader's task is to catch the moment when the yellow moving crossed the upper or lower border of the channel and make a deal in the right direction. It's done like this:
Making a BUY deal:
We wait until the yellow fast moving crosses the upper border of the channel upwards.
The closing price of the signal candle should be higher than the upper border of the moving channel
After you receive these signals, open a BUY market trade.
Stop-loss is set at the level of the upper border of the MA channel and trailed along this channel as new quote candles appear on the chart until the deal is closed by stop.
Making a SELL deal:
We wait until the yellow fast moving crosses the lower border of the channel down.
The closing price of the signal candle should be below the lower border of the moving channel
After you receive these signals, open a SELL market trade.
Take-profit is not set
Stop-loss is set at the level of the lower border of the MA channel and trailed along this channel as new quote candles appear on the chart until the deal is closed by stop.
As a possible option for exiting trades in this strategy, support/resistance levels are used, which are automatically placed on the quotes chart. That is, when the price reaches the level of resistance or support, you can close the deal on the received profit on Forex or rearrange the open position to breakeven.
Channel trading
It is quite easy to get a profit on Forex trading in channels, but it is also easy to lose earned points. Therefore, when trading according to this strategy, strictly follow its rules for entering positions, as well as money management. In trading, use no more than 2% of the deposit size. For trading, choose a horde of the majors of the market or a cross crus with a small spread. As for the timeframe for trading, the forex channel strategy can work on the time interval from M15 to H1.
In any case, the Racer channel forex strategy is an aggregate that can and can earn profit on forex! What we wish you!
It should be remembered that 50% of the result depends on the quality of the broker's trading conditions. Therefore, for real trading, it is better to choose a reliable forex broker from the rating.
We will talk about a simple forex strategy based on channel building.
How to get a strategy that will become a panacea for financial problems? The task is not simple. Finding a system that is easy to understand can be quite difficult.
But sometimes a lucky ticket still falls to those who were looking for it. If you are one of those, then "" is created especially for you.
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The market is constantly changing. It moves under the influence of various factors. Prices go up and down. They rarely stand still.
This state is called the term "flat", read -. Currency pairs can change the appearance of the chart in several scenarios.
The channel strategy is an easy way for a Forex beginner.
Where can it be applied?
One scenario is an uptrend or downtrend. The second is flat. The price has been idle for a long time. At such times, the foreign exchange market is in a state of calm.
The third state of the market is a price corridor within certain limits. This is what is called a channel. Within this channel, the price moves either up or down.
At the same time, there is a main trend. It can be rising or falling. The channel strategy for the Forex market provides for trading in this case.
is one of the best and most versatile trading strategies. It is actively used by traders in the foreign exchange market of over-the-counter derivatives.
The channel strategy will help, that is, make a profit in those areas of price change that are within the channel. It can be observed by analyzing the measured movement of currency pairs in the area of the indicated corridor.
Look
Watch a video on the topic here:
You can say thanks to the versatility and simplicity of the Forex channel strategy, those who clearly follow the rules of this approach to trading can read the article -.
It allows you to achieve significant success. It is available even to a beginner. Of course, despite the simplicity of this strategy, one should not forget about the elementary conditions of trade.
You need to close profits in a timely manner. This will avoid the problems that greed leads to. This is a big financial loss.
Application rules
The effectiveness of the channel strategy in the Forex market directly depends on the presence of a stable price channel. At the same time, such a channel should be located within the same time interval.
It is not recommended to use such a strategy within the framework of a high probability of a sharp change in the direction of price movement.
The channel designation is based on three registered extremums, which are located at the end of the chart. The channel boundaries are drawn along parallel lines.
One of them should connect two maximum points, and the second through a minimum point. Also, mirrored. The most extreme values, which are located in the shadow of the candles, will be a natural limiter for the lower and upper limits of the price corridor.
Attention should be paid to the fact that the distance that separates the extrema does not change the nature of the graph. If a large number of candles are grouped close enough to each other, and at the same time, the so-called group extremums can take place on the chart, then the channel boundary line, in this case, can be drawn through the highest possible value to the right.
Signals that indicate the need to open a position when the border of the channel is reached while moving inside it.
It is allowed to cross the border and stop, for example, at the level of 8-10% of the value of 50-70 points of the predicted movement to the target.
The target, then, should naturally be set on the opposite side of the channel.
The Forex channel strategy provides for opening only one position, which will contain a certain number of lots.
After you have opened a position, you need to concentrate on exiting the market. In order to find and fix such a moment, the stop is moved to the opening point, when the price has passed 90-100 percent of the 70 points of the predicted path in the direction of profit.
The next stage will be a trailing stop, or a squeeze when the next 50 pips are reached in 10. It is important to remember that there is no pressure in the direction of loss.
After reaching the channel border, a position is closed and a new one is opened in the opposite direction.
If the stop is triggered in the direction of loss, then you need to make a reversal. In other words, open a position in the opposite direction and set a target at the level of fifty-seven points.
If the second stop loss is also triggered, then it makes sense to stop trading and take a break for a few days.
Practicing traders know a very important feature of the movement of the price line within the interval located in the channels.
After the upper or lower border of the corridor is broken, the price moves to a segment that is within the absolute value of the channel width.
In order to determine the width of the channel and get an additional signal for the start of a market race, there is a special class of indicators called (follow the link, I talked about them there, also read the article - and -).
The role of indicators in the channel strategy
Oscillators are indicators that characterize the market. They are usually effective in the stationary market.
When the price moves within a fairly narrow "market corridor". Among the well-known indicators of this type, we should mention:
- force index
- Average True Range
- Bears power
- Bulls power
- Envelopes
- momentum
- Moving Average of Oscillator
- Relative Strength Index
- Relative Vigor Index
- Williams Percent Range
A simple strategy is the way to success
Today, there are quite a few strategies that promise good profits for the trader. But not all of them can boast of simplicity and accessibility.
Beginners often find it difficult to understand the rules to follow. At the same time, they may be required to be very observant and active enough to commit extraordinary and risky acts. In such circumstances, there is only one method. Simplified trading system and trading through .
Hello fellow traders!
Today I will tell you about one of my favorite strategies. We will talk about trading price channels and ways to make profit when trading in them.
First of all, let's go back to the fundamentals of technical analysis and understand what a trading channel is.
trade channel is a limited trading range in which the price moves for a certain period of time. The boundaries of the trading channel are limited by two lines: support and resistance.
Just like trends, trading channels are divided into 3 types:
- ascending;
- descending;
- lateral (flat).
Let's take a closer look at each of them and use them as examples. ways to correctly build a price trading channel.
- is formed on an uptrend movement. As you know, an uptrend is successively increasing highs and lows, so to build an uptrend channel, you need to determine the beginning of the trend movement and the first two lowest lows ( reference points) draw a trend line ( main channel line). Then, parallel to it, project another trend line to the highest point between them.
Look at the picture below:
- formed on a downtrend. The construction rules for this channel are similar to those used to build the upstream channel. Only the main line of the channel is drawn through the reference points built on the highs (because the movement is downward).
Let's look at the picture:
Lateral trading channel (flat)- is formed when the price moves in a horizontal price corridor for a certain time, while new highs or lows are not formed. This state of the market is called consolidation and occurs either at the end of the current trend, or before its further continuation.
You should also pay attention to the fact that Trading channels can be confirmed or unconfirmed. The channel is considered confirmed when the price touches its borders (support and resistance lines) more than 2 times. Otherwise, the channel is considered unacknowledged.
TRADE IN THE CHANNEL
Before we go directly to the rules of trading in the trading channel, it is necessary to “finish” our trade channel, adding a few important lines.
A line equal to 50% of the total range width (for example, if the channel width is 600 pips, then this line will be drawn at the level of 300 pips from any channel border). Two lines drawn inside the channel from its borders at a distance equal to 10% of the total width of the channel (if our channel is 600 pips, then the lines are drawn at a distance of 60 points from the support/resistance lines).
Unclear? Then look at the picture:
Trading in the channel is carried out from its borders (support and resistance lines). With an ascending channel, we buy at the lower border and sell at the upper one. We fix profit on the opposite border as soon as the price enters the zone beyond the 10% line.
Why is that?
We remember that the market is not an exact science and the price behavior in the market is unpredictable, so we can only assume, and in order to minimize risks, we give part of the potential profit to the market by closing the deal before the price touches one of the borders.
You can also enter a deal from the 50% line. This level is a strong support/resistance level. But in this case, you need to be very careful and it is desirable to enter the market only in the direction of the channel (trend).
Where to place a stop loss? Unfortunately, there is no definite answer to this question. It all depends on your deposit, money management, the volatility of the pair and the time frame you are working on. I stick to the rule of removing the stop loss for the previous significant market extremes.
If you use indicators in your trading, you can look for a signal to enter / exit a position from them.
In this figure, we can see how the price enters the 10% zone, while the stochastic has a crossing of the fast and slow lines, as well as an exit from the overbought/oversold zone. As you can see, this indicator gives, though weak, but still an additional signal to open a position.
TRADING ON THE BREAKOUT OF THE BORDER OF THE PRICE CHANNEL
Nothing can go on forever and any channel will be broken, it's just a matter of time. What should a trader do if this happens? Everything is very simple! In this case, the channel ceases to be a channel for us, and only one of its borders remains (upper or lower), which will be a simple trend line, and this line, in turn, will be a support/resistance level.
And we will trade on the breakdown of the level (if you suddenly still don’t know how to trade from the levels correctly, then read on).
What are the possible scenarios for the development of events after the price breakout? There are only 3 of them:
- The price breaks through the level, but the breakout turns out to be false and the price returns to the current price channel. A false breakout is a rather unpleasant thing, but it is a very serious signal that there will be more attempts to breakout this level.
- The price breaks through the level (true breakdown) and purposefully rushes towards the channel breakout
- The price breaks the channel border, goes some distance towards the breakout, and then returns to the broken level. The level is being retested.
The safest point to enter a position is to open a trade on the return to the broken level.
Also when trading on the breakdown of the price channel (and when trading within the trading channel) You have to wait until the bar closes. It is very important! With hasty actions, you can easily run into a false breakdown and this will seriously rattle your nerves.
Another important point worth mentioning is the direction in which the channel was broken. If the breakdown is in the direction of the broken channel, this is a fairly strong entry signal. If the breakdown is carried out in the opposite direction, it is necessary to be very careful and cautious, since the probability of a false breakdown is high.
But that is not all. There is another important nuance that we have no moral right to pass by! And this nuance lies in the fact that any trading channel consists of the same trading channels, but built on lower time intervals. In turn, this channel is part of a channel built on a higher time frame. I call this the “channel nesting principle” or “matryoshka principle”.
Pay attention to the picture below. On it, the "blue" trading channel is built on daily charts, and the "purple" channels are built on hourly charts.
The methods of working with such channels are exactly the same, but it is important to understand that a price channel built on a higher time frame is more important than channels built on lower timeframes.
Let's summarize and collect what is written above into a specific algorithm of actions.
First, we look at whether the price is currently moving within the trading channel.
- We determine the direction of the trend/channel and outline its boundaries.
- We are waiting for the price to reach one of the channel boundaries.
- We are waiting for a breakdown or rebound from the level.
- We issue orders.
I repeat once again that it is desirable to trade (for a breakout or a rebound - it does not matter) in the direction of the trading channel, as this will coincide with the direction of the trend.
Let me finish with this. If you have any questions, then ask them below in the comments or write letters via feedback.
Good luck in trading!
P.S. I almost forgot. In order to determine the trading channel and correctly draw its boundaries, it is necessary to "fill your hand". I can help you with this. To do this, open the daily chart of any currency pair, rewind a few years back and begin to "outline" all the channels that you see. Believe me, over time you will get much better.
