Forex price channel: Trading strategy and methods of its construction. Parallel channels strategy - trading simply and efficiently Channel trading strategy
From the article you will learn:
Let's first find out what a trading channel is.
This is a price model, in which the change in the currency quote occurs in a certain trading range over a period of time that we can determine, usually after this corridor is broken.
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Thus, one side of the channel border is a resistance level, the other is a support level. You need to look at the direction of the trend in order to determine the ascending channel, descending or sideways (read -,).
And most importantly, a hundred years ago, I made a book-brochure that I didn’t post - its basis is how to build a channel correctly, if necessary, download for like:
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It's time to figure out how to build trading channels
For channel trading, Forex provides very convenient opportunities. An ascending channel is built by a trader using a trend line through the last two lowest prices in the last two waves. Next, a parallel line is drawn along the highest price point in the wave, while it should be between the two lower points.
A descending channel is built by a trader using a trend line through the two highest price points, candles, bars. Further, a line is drawn parallel to them, which is built through the lowest point in the wave. In this case, the minimum point must be between the two lower minimums.
Also, you need to understand that there may be confirmed and unconfirmed channels.
Verified channel- this is the one in which the upper, as well as the lower border were the border for the price twice each.
Then they become support and resistance. If the line of support and resistance are based on only one point, then it can be considered unconfirmed.
Channel trading is a commonly used and very attractive strategy for many traders. It is regularly used in practice. This strategy is considered highly profitable with a relatively low risk level.
The trading channel should be traded by dividing it into three zones: the line in the middle of the trading channel and, following the picture, at a distance of about 10% from the support line and the channel resistance line.
You need to trade not in the inner zone of the channel, but only from its borders - the levels of purchases and sales. The direction should be chosen from the nearest border to the opposite one. To apply this strategy, the width of the trading channel must be at least .
A position is entered when the price has reached the sell or buy zone. The entrance is also carried out by .
A protective order should be placed outside the channel at a distance of ten to twenty points or according to your risk management rule, that is, by a percentage of the deposit amount. You need to take profit when the price reaches the border level on the opposite side.
You can also close some part of the profit in the middle of the channel, the other half of the position upon reaching the border on the other side.
Main mistakes when trading in a channel
- The trade is entered inside the channel. The position in this case “catches up” with the price. You need to trade only from the boundaries of the channel, so you need patience to wait until this level is reached.
- at an insufficient distance, this leads to a loss of position with a slight exit of the price beyond the channel lines.
- at the wrong moment. It is recommended to wait until the first counter fractal closes, which is associated with frequent retesting of the channel boundaries.
- Closing the deal too soon. You need to follow discipline or use a partial exit from the trade.
- Closing a position manually. It is better to do this with stop orders and when the price is close to the borders.
Channel trading also works very well with the signals of some indicators, for example, which gives a signal for a reversal, as well as for.
If the stochastic has formed and the price is far from at that moment, such a signal should be ignored. If the signal is displayed when the price has reached the channel border in the 10% zone, then this signal is recognized as true.
Professional traders often use these moments to add to open positions. But beginners timidly skip such a signal to add to the position.
Trading strategy during the breakdown of the channel borders. Also a commonly used trading strategy
Trading at the level of a breakout of the channel border is a simple opening of a sell position in case the price breaks through the support zone, or a buy position in case of a breakout of the resistance zone. The strategy will be effective in the conditions of a trend in the market, while it is completely ineffective in the state of a flat in Forex.
Opening a position is performed when the channel level is broken at some levels, they should be located at a certain distance, determined by you empirically, from the channel line.
A stop loss order is placed inside the channel. Preferably in the middle of it, of course, this should not contradict your trading strategy and risk management in particular. It can also be located in front of the border of the broken channel.
The breakout of the channel border triggers the following several scenarios for the development of the price movement:
- A strong, abrupt price move in one direction with a lot of trading volume.
- Price movement and retesting of the border of the channel that was broken, such a return to the border. And then, the continuation of the price movement in the direction of breaking through. Thus, the scheme of penetration, rollback, continuation of movement works.
- False channel breakdown. It occurs when the price, which has broken through the support or resistance line, after a short break returns to the movement in the channel.
For beginners in trading, the best option for forex trading through channels is to enter the market after the second test of the broken border. This is the most reliable signal, even considering that there is a possibility of missing a strong move. You shouldn't be upset about this. Opening trading positions on the movement often meet with a false breakout, and this leads to losses.
It is also important to understand that when starting to trade, you need to accept its rules. For example, a buy signal is not reliable if the upper limit of the ascending channel is broken, just as the broken lower limit of the descending channel is not a good enough reason to enter the market.
Therefore, when applying the trading strategy about breaking through the channel, you need to apply the following simple rule. A reliable signal occurs when the lower zone of the ascending channel and the upper zone of the descending channel breaks through. It is important to understand that a breakout of the ascending and descending channels in their direction is also possible, but only if it is confirmed. These can be a breakout of the channel boundaries with a large volume of trade.
The "Parallel Channels" strategy can be applied to any market without currency pair or timeframe restrictions. You can work both on a price rebound from the channel border, and on its breakdown, using only a couple of simple filters. We recommend including channels in your arsenal, no matter what trading style you prefer.
To build, you need to have 3 points:
On the chart at any time, you can select several channels on different timeframes, in which the price moves. Even if it seems that at the moment the market is flat, it may turn out that on the older time interval the chart is still within the channel.
The “Parallel Channels” strategy for binary options allows you to work both on the rebound and on the breakdown of its border.
There are several types in the MT4 terminal, the screenshot above will give an example in which an equidistant channel was used. In addition to it, there are:
![](https://i2.wp.com/howtotrade.biz/wp-content/uploads/2017/09/2-14.jpg)
This method of work is good because you don’t need to download anything for free or for money to trade using the Parallel Channels strategy. Standard trading terminal tools are enough.
How to trade
We said that it is possible to work both when the price moves in the channel, and when it goes beyond it.
Breakout trading
In this case, the trader will trade on the price rebound from the border. There is always a risk that the price will not fight back, but simply “stick” to the upper or lower line. In order not to fall for this hook, it is advisable to use additional filters in the form of:
![](https://i0.wp.com/howtotrade.biz/wp-content/uploads/2017/09/5-12.jpg)
One of the methods of working with channels is to allocate a zone near its border equal to approximately 10% of its width, which simplifies the work. The price rarely makes a perfect rebound from the border, so it is more convenient to trade with the touch zone. Let's consider the same example on a smaller timeframe.
Selling from the upper border was carried out in the direction of the trend, so there is a high probability that the price will come to the opposite border of the channel. Part of the profit could be fixed on the middle line.
But purchases during the rebound from the lower border give a much smaller profit, trading is carried out against the trend.
“Parallel channels” strategy for binary options can also be used, but it is difficult to choose an expiration date. The price may not go in the direction of the rebound immediately, but after 5-10 candles, as in the example above. If on Forex a trader can simply wait out this moment, then in the case of binary options, the transaction can close with a loss even if the signal as a whole then works out.
In the example, if the expiration period were chosen equal to 3 candles, then the first transaction would have brought a loss, but the second one would have worked in plus. By increasing the expiration period to 5-6 candles, the first trade could also be turned into a profitable one.
Breakout trading
In this case, the price breaks through support/resistance and fixes behind it. This is where a new trend often begins, but this does not always happen. The “Parallel Channels” strategy for binary options and forex allows you to trade in this case as well.
You can make deals:
![](https://i1.wp.com/howtotrade.biz/wp-content/uploads/2017/09/8-5.jpg)
A true breakout is usually accompanied by a surge of activity, if the price hardly fixes a little above/below the line, then this cannot be considered a breakout. The stop is usually placed beyond the previous local extremum or the minimum/maximum of the breakout candle.
The first profit-taking target is the width of the broken channel, pending in the direction of the breakdown. Further, double, triple, etc., the width of the punched channel is postponed. You can use the Fibo channel for the same purpose.
A retest of a broken resistance/support occurs most often when the channel has a slight slope (about 30°).
If you use this approach when trading binary options, then the difficulty remains the same as when working on a rebound - it is difficult to choose an expiration date. If you buy the option immediately after the breakout and choose it too large, then the option may expire at the time of the retest and you will be in the red.
Conclusion
The “Parallel Channels” strategy for binary options and forex allows you to work almost without the use of indicators. They are useful only as an additional filter.
The advantage of this trading method is that it is universal, suitable for all markets and any time intervals. The work is carried out only with the price chart, so the strategy does not become obsolete over time.
Looking at the price chart of Forex currency instruments, we will see that the price moves chaotically. But this is not entirely true, and some limitation of its movement still exists. Price movement occurs in various ranges, which are called Forex channels, the form of which is influenced by the state of the market and the time period under consideration. Channel boundaries are potential reversal points of movement, and knowledge of this moment is used in Forex trading in order to predict and, consequently, enter the market on a reversal. Trading based on channels is characterized by low risks, provided that the rules for opening transactions according to the chosen strategy and are observed.
Fundamentals of channel trading.
Forex channel trading assumes that the price will move in a certain range in a certain time period. When approaching the border of the channel, the price can behave in two ways - break through it and go further, or touch, turn around and go in the opposite direction. In this case, even if a breakdown occurs, it will be considered false. It is necessary for a trader to be able to distinguish between the true and, and to know in which direction to "open".
Usage efficiency channel strategies also depends on the time frame. The recommended period is from M30, on shorter periods of movement, prices are more chaotic and do not obey the rules of price behavior in the channel. The older the channel, the more obtained during its analysis.
To build the boundaries of the Forex channel, you must select at least two extremums for one boundary and one - to build the opposite boundary. It is better to place orders inside the channel or on its borders - in this case, when false breakdown the price will reverse, the order will be opened and will be able to make a profit with low risks. To be able to estimate a larger number of extrema, the conditions for are recommended to be averaged. If a trader is not sure that the price will continue to move, but there are also no reliable signals for its reversal, then two orders can be opened - a market one inside the channel and one pending outside its border in the opposite direction. The size of the take profit and stop loss in each strategy will be determined by the volatility of the instrument's price.
Depending on the width of the channel, the method of adding orders will be determined for each new small rollback within the price range. The size of the stop loss for each should be calculated in such a way that in the event of a sharp reversal or rebound in the price, it will be covered by the profit received from the main transaction (one of the varieties). The primary stop loss is determined by the volatility of the instrument. Below is a trading scheme inside a horizontal Forex channel, pay attention to how orders and stop losses are set:
Rice. 1. Trading scheme on the example of a horizontal channel.The primary SL level should remain unchanged until the completion of the first rollback. The deal will be transferred to breakeven after the first counter extremum is formed. As the price moves and pullbacks appear, stop-loss levels of additional orders will move up to . When approaching the channel border, additional orders are no longer placed.
- - place orders above/below the middle of the channel;
- - open trades at the moments of price breakdown of borders;
- - set primary stop loss levels close to the channel borders.
Orders must be closed strictly according to the rules of the channel strategy - by take profit or by stop loss.
Channel building tools.
Forex channels can be horizontal, upward, downward, or dynamic. On the chart, they can be built manually or using auxiliary tools, which are special tools in the MetaTrader 4 terminal in the Channels group, or indicators:
![](https://i0.wp.com/avtoforex.ru/uploads/posts/2016-08/instrument-kanaly.jpg)
The most popular indicators are those with dynamic borders, Donchian Channels with hard borders. Often used by traders, the Super Signals Channel indicator is a combined version of the indicator that works with any and on different time periods:
![](https://i1.wp.com/avtoforex.ru/uploads/posts/2016-08/indikator-super-signals-channel.jpg)
Its peculiarity lies in the way borders are drawn - it draws them not by closing prices, but by extremums. A price reversal should be expected when a subsequent extremum is reached. For all its advantages, it also has a drawback: on small time frames, it gives a lot of false signals and redraws its readings. You can download the Super Signals Channel indicator from the link:
Download super-signals-channel.rar(downloads: 132)
Trading without indicators.
The Equidistant Channel graphical tool is one of the frequently used ones due to its efficiency. It is built according to three extrema: the main line is built according to two extrema on one side, and an additional parallel line is built on one more on the opposite side. When analyzing such a channel, the trader assumes that the price will move within its boundaries, and depending on the direction of the trend, trading will be carried out (click to enlarge):
![](https://i0.wp.com/avtoforex.ru/uploads/posts/2016-08/thumbs/torgovlya-v-voshodyashhem-kanale.jpg)
When trading in an equidistant channel, it is recommended to follow the price on higher time frames, as the price may approach the boundary of the higher channel and change its direction, "knocking out" the deal from the market. And the older the analyzed time frame, the more reliable the entry signals (the screen can be enlarged):
![](https://i2.wp.com/avtoforex.ru/uploads/posts/2016-08/thumbs/trend-na-starshem-taym-freyme.jpg)
When constructing a channel with the tool, the main line is also drawn. Additional ones (there are several of them) are built parallel to the main one at a distance of 0.618, 1.0, 1.618, 2.618, etc. When the price crosses these lines, we can consider the possibility of entering the market:
![](https://i0.wp.com/avtoforex.ru/uploads/posts/2016-08/kanaly-fibonachchi.jpg)
Fibonacci can be used as an additional tool in trading, where the main one will be the channel built using trend lines. In this case, Fibo will confirm the signal when the price approaches the borders of the descending (ascending) channel. You can also set targets on its lines - TP or SL, and use it as a price. The strength of the signal will be higher if the retest of the channel boundary coincided with the Fibo correction level.
Strategy based on Keltner channels and ADX indicator.
Let's consider an example of a channel strategy that uses the KeltnerChannels indicator and ADX . The first one is installed on the chart of any currency pair (provided it is stable) with standard parameters. The ADX indicator is set on a chart with parameters 14, level 30. Trading according to the strategy is carried out on a time frame from H1 and above, during the European and.
A sell deal will be executed either by a market order, or under the Low point of a closed candle, if the following conditions are met:
- - signal candle closed below the bottom of the channel, formed by the indicator KeltnerChannels ;
- - ADX indicator lines -DX and +DX (these are white and yellow lines in the indicator window under the main chart) crossed before the channel breakout. It is desirable that the intersection occurs below level 30:
![](https://i2.wp.com/avtoforex.ru/uploads/posts/2016-08/prodazha-po-strategii-keltner-adx.jpg)
Stop loss in this case is placed just above the local maximum or above the upper channel line.
Buy trades will be opened using Buy Stop above the high of the closed candle or a market order under the following conditions:
- - signal candle closed above the top of the channel KeltnerChannels ;
- - ADX +DX and -DX indicator lines crossed until the channel is broken. It is desirable to cross below level 30:
![](https://i2.wp.com/avtoforex.ru/uploads/posts/2016-08/pokupka-po-strategii-keltner-adx.jpg)
The stop loss level is set below the nearest low or below the lower channel line. Profit per trade, according to this channel strategy, is fixed when using . Also, the deal can be closed after the candle closes: for sell deals - on a rollback up above the upper channel border, for purchases - on a rollback down below the lower channel line.
You can download the Keltner Channels indicator from the link below:
Download keltner-channel.rar (downloads: 37)
After unpacking the archive, the indicator file is copied to - ‹data_folder›\MQL4\Indicators\ . The ADX (Average Directional Index) indicator is included in the standard set of the MT4 terminal and can be found in the Navigator - Indicators - Trending window.
Conclusion.
The use of channel strategies allows the trader to predict price reversals with high accuracy. However, there is a drawback, which is that traders interpret charts in their own way and build channels in different ways. Also, there are no generally accepted criteria that determine the breakdown or rebound from the border.
For this reason, each trade must be accompanied by a signal confirmation. A confirming signal can be received both from Fibonacci levels and from other indicators. For example, oscillators can confirm the signal - such as stochastic, RSI. Unlike indicator strategies, channel strategies do not lose their performance over time. Subject to the competent selection of auxiliary instruments, compliance with the rules of entry, exit and money management, you can achieve effective results in your trading.
Today I decided to tell you about channel strategies. According to the theory, if you correctly determine the price channel, then you can make good money with it. Names this idea underlies all channel strategies.
Price channels are self-sufficient, so it is quite realistic to trade only on their basis. But most often, additional algorithms are used that confirm the correct entry into the market. These could be Fibonacci levels, divergences or candlestick analysis.
Channel strategies suggest only 2 scenarios for the development of events: the price will touch an important level and reverse or break it. Different strategies imply different rebound and breakout criteria, so they have different rules for entering the market. Also big role plays the type of price channel that is used in trading strategy.
Varieties of price channels
Any trader can use any of the following types of price channels to trade:
- Equidistant.
- Fibonacci channels.
- Linear regression.
- Corridors with standard deviations.
- Moving averages that form a price channel that moves along the Y axis.
Most often, equidistant channels are used in strategies. These corridors are easily built on the price chart and are very effective at the same time. An equidistant channel is built using three extremes: 2 highs and 1 low, or 2 lows and 1 high. First, a straight line is drawn through the first 2 points, then a parallel line is drawn through the third point. Strategies based on equidistant channels show good results.
The second type of price channels are Fibonacci channels. Here the first straight line is drawn according to the same principle as in the first case, after which at a distance of 0.618; 1.0; 1.618 and 2.618 additional parallel lines are built. In addition, it is also possible to construct additional lines at a certain distance from the channel boundary.
The next type is linear regression channels. To build such a corridor, it is enough to mark a certain zone on the chart, and the channel itself will be built automatically. The distance from the central straight line to the corridor boundaries is equal to the maximum distance from the central straight line to the closing price.
Standard deviation channels are similar to linear regression channels. But here the distance between the middle line and the channel borders is equal to the standard deviation of the closing price from it. Depending on the location of the price in relation to the average straight line, one can judge the mood in the market.
The essence of channel strategies
Almost all channel strategies involve following certain rules of breakout and rebound from the channel borders. Most often, it is at this stage that most mistakes are made. Often, novice traders mistakenly take a small puncture of the channel border for a breakdown, and a small touch for a rebound. In this case, the trader, of course, does not earn anything with the help of channel strategies.
The appearance of a rebound can only be judged if the current candle closes. The reliability of the received signal increases significantly if strong reversal patterns appear on the chart during the rebound.
As for the breakout, there are several trading methods. Orders can be opened immediately after the channel boundaries are broken. This way is more aggressive. A more conservative way is to enter the market after a price correction after a clear breakout.
An example of using a channel strategy
I propose to consider the situation as an example. We build a price channel on a four-hour time frame; on shorter time intervals, we can build a few more additional channels, which can also be used to enter the market. Additionally, you can also use the MACD indicator, on which we will identify divergences.
All channel strategies start with building a price channel and tracking price behavior relative to the channel. It is also possible to build several additional channels on shorter time intervals. Next, we need to monitor the price movement in relation to the price channel. It should also be taken into account that signals received from longer time intervals are more reliable.
If the candle touched the border and closed inside it, then most likely it was a rebound. It is recommended to open an order in the presence of confirming signals, or when a divergence appears or when a candlestick pattern appears. Orders are created with stops set near the nearest extremums. Trades are created with take profits, which should be 2 or 3 times more than stops.
In our example, there was a breakdown of the channel. If we had opened an order on time, we would have been able to make good money.
Nuances of channel strategies
Channel strategies, like any other strategies, are endowed with their drawbacks. The main disadvantage is that there are no generally accepted rules for breakdown and rebound, as well as the subjectivity of building a channel. To build a channel, you need to find 3 extremes, and each trader chooses his own extremes. It is also worth noting that price channels often need to be redrawn during the price movement, which also affects the trading performance.
Currently, there are no generally accepted criteria for rebound/breakdown of a channel. At the same time, professional traders recommend that you carefully monitor exactly how price level behaves near the channel boundaries:
![](https://i1.wp.com/womanforex.ru/wp-content/uploads/2016/10/kanalnye-strategii-4.jpg)
Channel strategies are popular among traders because over time they do not lose their effectiveness and relevance. This feature significantly distinguishes channel strategies from trading methods based on the use of various indicators.
In order to earn income using channel strategies, it is enough to strictly follow the rules and correctly choose auxiliary tools.
You, as a forex trader, are reading this article to appreciate the significance of market trends. Today we will consider one of the methods of analysis and trading on the price trend in Forex, namely the price channel method.
The price channel is the standard version but displays an additional parallel line. In a channel structure, the price trend clearly states the limits for its tops and bottoms.
Channel trading method
So how do we draw a channel on the chart? We will start by looking at the price action and try to define a trend movement price analysis where tops and bottoms move with the same intensity. In the case of an uptrend, we can draw a line that goes through the bottoms and another line parallel to it that goes through the tops of the price action. Voila! You have just drawn a channel on the chart!
Above you see a standard trend channel drawn on a bullish trend. The lower level of the channel is a typical bullish trend line that goes through the price action bottoms. The upper level is parallel to the lower trend line and connects the diagonal border of the price action. This creates a classic price channel.
Let's take a closer look at the example above. The lower level of the channel plays the role of support, and the upper level plays the role of resistance. The black arrows on the chart show the support and resistance channel functions. See that when the price falls to the lower level of the channel, it bounces up. Conversely, when price interacts with the upper level of the channel, it tends to bounce down.
Knowing this, traders can use channel levels as entry and exit points. When the channel is bullish, you may be looking for opportunities to buy a Forex pair when the price bounces off a low level. You can hold the trade until the price reaches the upper level of the channel. Thus, one should strive to trade the channel's impulse course. When the price bounces off the top of the channel, you can trade a potential bearish move towards support. However, this is generally less desirable as corrective price movements are relatively less momentum in the price movement of the trend.
Price channel breakout
As with all price trends, the price channel trend must also come to an eventual end. We have a channel breakout where price breaks through an upper or lower level and closes far beyond that level. Thus, the price action exits the channel and it no longer matches the limits of its previous spanned structure. Below is an example of a breakthrough:
Above you see a continuation of the channel we discussed earlier. As you can see, the price ceases to match its levels and at some point breaks through its lower level (red circle). This is a channel break. The price breaks through the lower level, which indicates that the downward influence on the Forex pair is strong enough to break the bullish trend. A new downtrend begins after that. The price enters a bearish trend.
Channel breakouts warn of an end to an existing trend as well as potential price action in the direction of the breakout. In this way, traders can prepare to enter trades in the direction of the breakout in order to catch new upcoming price action. This is a simplified explanation of the channel breakout trading strategy.
Trading with Price Action
As we wrote earlier, the price action channel in Forex involves trading the channel's internal bounces. Also, when the channel dries up, you can prepare to trade a breakout that could lead to a price reversal. Now let me show you how it works:
Above you see the hourly chart of EUR/USD from May 5 to May 12, 2016. The image illustrates a price action system using a channel.
The chart starts with a rapid price decline that creates a bottom (1). This is actually the first channel point currently being created. Further price action sends price up, creating a top (2). Then we see a push from the top, which sends the price down to point (3). Further price increase stops at point (4), which confirms the channel.
This is the first opportunity to trade on the chart - at point (4). When the price touches the upper level of the bearish channel for the second time, it creates the potential for a short trade. Further price bounces create two more long trades, and two more short trades. Although it should be noted again that since this is a bearish channel, we would rather trade on the short side and wait for the channel to break out and then look for a buy trade.
This is the first trading opportunity on the chart - at point (4). When the price touches the upper level of the bearish channel for the second time, when it creates the potential for a short trade. Further price bounces create two longer trades and two shorter trades. Although we should note, once again, that since this is a bearish channel, we would prefer to trade the short side and wait for the channel's breakout before looking for a long trade.
Look at the last short opportunity in the channel. Look, the price bounces down, but does not bottom out. The price returns to the upper level and breaks it up (red circle). The price action breaking the high creates a signal for a short trade. However, at the same time, the price creates a long signal for a new trade as we now have a bullish breakout of the bearish channel.
The price moves up sharply after a breakout. You would have two options to exit this long breakout trade. The first is when the price hits resistance at $1.1435 and bounces down. The second option is to close a long breakout trade when the price breaks the support created after the bounce from $1.1435. In both options for exiting the trade would be profitable.
One of the most popular channel indicators is the linear regression channel. This type of channel indicator looks similar to a standard channel, however the Linear Regression Channel Indicator has a middle line, which is the average of the price. The upper and lower levels are evenly separated from the midline. Thus, the middle line of the linear regression channel also acts as support or resistance. In addition, this line can be used as a trigger to enter trades in the direction of the trend. Look at the image below:
This is the standard linear regression channel. You see the top level, the bottom level and the middle line. The black arrows on the chart chart show when the direction of price action responds to the median as support or resistance. After a rebound from the middle line, the price usually returns to where it came from. At the same time, when the price breaks through the middle level, we see further movement towards the opposite channel line.
Traders can use the average level of the linear regression channel as confirmation of their trades. At the same time, as well as the middle line can be used to reach exit signals.
Donchian Canal
Donchian channel - another one trading indicator channel. The Donchian Channel indicator is calculated using the highest high and lowest low of N p periods.
These highs and lows are marked with horizontal lines, with dynamically changing levels depending on the highest high and lowest low of the progressive periods. Thus, the price action encapsulates the Donchian price channel.
The Donchian trading indicator also has a middle line. This line is simply the average between Donchian's high and low levels.
The upper and lower levels have support/resistance features. However, when the price starts hitting the upper band continuously and prices continue to rise, then we will get a long signal on the chart. The same is valid for the bottom band. If the price action starts to hit the lower band of the Donchian channel and pushes it down, then you will get a short signal. In other words, widening the distance between the upper and lower channels gives us a bias in price action and trend formation. At the same time, the middle range can be used as an additional confirmation of entry or exit signals.
You may have noticed that the Donchian Channel indicator resembles the . Indeed, they are used in a similar way. However, we must understand the difference between them. The Donchian indicator is based on high and low (high/low) price over X periods, while the Bollinger Bands indicator is configured based on volatility.
The image below shows the Donchian channel indicator and illustrates a forex channel scenario:
Above you see the Donchian channel strategy. It looks pretty chaotic, however, once you figure out what to look for, this initial chaos starts to make sense. When the two bands are tightly offset, the Donchian bands act as support and resistance. In this phase, the price bounces up and down between these two groups. We consider this a period of consolidation, or favorable market conditions. You can trade price moves between these two groups, but this is not the most best use Donchian trading method.
The most attractive feature of the Donchian indicator is in recognizing strong breakout impulses. We see this when the price starts to beat the upper band, moving it up, or starts to beat the lower band, moving it down. The green arrows in the image indicate when price is making higher highs. Thus, the upper Donchian band also starts to move up. This means that the price is rising at a relatively high rate, creating a suitable entry for a long trade. Then the bands become compressed again. The price begins to experience the upper and lower bands as resistance and support. Suddenly, price action starts to beat the lower Donchian band, creating lower lows (red arrows). This creates the possibility of a short position on the price chart.
As for the image above, the correct place to go long would be with the first green arrow on the chart. This is where the price closed above the previous consolidation level and has been testing the upper Donchian channel for the last few periods in a possible attempt to break higher. The trade can be held as long as the price does not break the middle band down. This would be a signal not to enter into a position. As you can see, this is indeed the case when these bands get closer together, the pair starts to range.
To trade the subsequent price decline, we would apply the same logic we used for the long example. The optimal place for a short position is marked by the first red arrow on the chart. This happens after the price bounces off the upper band and after the price closes below the Donchian support level. At the same time, these two groups are just beginning to expand, giving us a hint that further price cuts are more likely. We see that each bottom is lower than the previous one and the lower Donchian band decreases with each additional period. We can conclude based on this price action behavior that the downside of the price is relatively strong. A short trade during this price run should be taken until the price breaks the middle band up. This happens on the last candle on the chart.
Trading strategy
Channel Trading applied to currency pairs is a simple and effective practical guide that can help forex traders to be on the right side of the market. Each of the three channel trading systems we have discussed has positives and negatives.
If you are a beginner, it may be better for you to use the simple price action trading channel method. Select price lows and highs during a trend and draw a channel. And just trade inside bouncing moves, preferably in the direction of the existing trend. Also, be sure to keep a close eye on . Eventually, there is bound to be a channel breakout, which can lead to a sharp price move within a relatively short period of time.
If you are a more cautious trader and always want additional confirmation for your trading system channel, then a linear regression channel might be the right tool for you. Find two highs and lows and draw a regression channel over them. And look for a bounce from an upper or lower level, followed by a break through the middle level. For the conservative trader, the middle line can provide an additional level of confirmation. But be aware that waiting for this additional confirmation, the potential profit is likely to be lower.
And finally, if you feel like you are more experienced and like the idea of using more complex, dynamic, support and resistance levels, then you can use the Donchian channel method. Look for the moment when the price broke the recent one and starts hitting the upper or lower band, creating pressure in that direction. Open a trade if the two bands expand. And if your trade is executed properly and the price continues to go in the given direction, you should hold your trade until the price action breaks the middle band in the opposite direction.
Conclusion
Forex price channels are one of the most basic price action concepts that traders should be aware of.
Channels are created when price action creates tops and bottoms with the same intensity.
If you can draw two parallel lines through the tops and bottoms of the price action, then you have a Price Channel on the chart.
Traders use referral methods to set entry and exit points for their trades.
The main trading channel strategy involves entering a trade when a Forex pair bounces off one of the extreme channel lines. The trade should be in the direction of the bounce and should be held until the price approaches the opposite channel level.
Trading bounces in the channel that occur in the direction of the trend are more attractive to trade. Corrective price moves are short and riskier.
The end of the channel ends with a breakout, which is likely to lead to a counter price move in the direction of the breakout.
The linear regression channel is a variation of the regular channel. The difference is that the linear regression channel has an additional line between the upper and lower levels. This line is parallel to two levels and represents the average value of the channel.
The Donchian channel indicator creates horizontal levels during the largest and smallest X periods on the chart. Therefore, the Donchian channel covers the price action during this set period. The preferred Donchian signal is created when the price starts to beat the upper or lower band, moving it further. This creates a signal in the direction of the traffic area. The Donchian channel also has a middle line, which is the middle line between the upper and lower bands.