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Channel Trading Basics

By , Forex Trading Instructor
08 July 2013 19:00 GMT

Article Summary: Creating a Forex trading strategy does not have to be a difficult. Today we will review the basics of spotting and trading price channels.

Pricing channels can be an excellent technical trading strategy for trending markets. One of the reasons they are so popular with market technicians is that e 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. Today we will review how to identify a pricing channel, and how to organize a trading strategy using this charting pattern.

First, let’s learn how to find a pricing channel on our charts. This can be done by identifying and connecting a series of highs and lows on your graph, which will act as levels of support and resistance. Below we can see a descending channel on the AUDUSD 2Hr chart. Notice how resistance has been formed by connecting the two previous highs to form a line of resistance (price ceiling). Since resistance is descending, support (floor) should be descending as well as the AUDUSD creates a series of lower lows. These lows should run parallel to the resistance line that was previously drawn completing the price channel pattern.

The AUDUSD in our example today is considered a descending price channel, but it should be noted that channels may also rise in an uptrend and trade sideways in ranging markets. Once the pattern has been identified along with its direction, a trader can then prepare to enter into the market.

Learn Forex – USDCHF 4Hour Trend

Channel_Trading_Basics_body_Picture_2.png, Channel Trading Basics

(Created using FXCM’s Marketscope 2.0 charts)

Trading the Channel

Once a price channel has been identified, identifying areas to trade becomes a very straight forward proposition. 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, such as the AUDUSD seen below, traders will look to sell the market on a test of 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.

Learn Forex – USDCHF Channel Entries

Channel_Trading_Basics_body_Picture_1.png, Channel Trading Basics

(Created using FXCM’s Marketscope 2.0 charts)

Exiting Positions

Regardless of your trading strategy, traders should always have a plan to exit the market. One of the benefits of channel trading, is that stop and limit levels are built around our previously defined levels of support and resistance. In a downward sloping channel, stops should always be placed above a level of resistance. In the event that price begins printing higher highs, traders will want to exit positions to sell the AUDUSD as quickly as possible.

Profit targets will be set using the support line of the pricing channel. Traders will extrapolate this value by extending our line on the graph. Traders will want to exit positions with a limit order, when price touches this area of support. If the channel is to continue, price may bounce back to resistance at this point, continuing our descending charting pattern.

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .

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08 July 2013 19:00 GMT