We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Mixed
USD/JPY
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bullish
Oil - US Crude
Bearish
Bitcoin
Bearish
More View more
Real Time News
  • Forex Update: As of 07:00, these are your best and worst performers based on the London trading schedule: 🇦🇺AUD: 0.07% 🇳🇿NZD: 0.07% 🇨🇦CAD: -0.04% 🇯🇵JPY: -0.11% 🇪🇺EUR: -0.14% 🇬🇧GBP: -0.40% View the performance of all markets via https://www.dailyfx.com/forex-rates#currencies https://t.co/QTzSOIKToT
  • CHF Swiss Sep M3 Money Supply YY Actual: 2.6% Previous: 2.7%
  • Yet more #Brexit delay keeps gold underpinned, charts suggest it could gain but fundamental risk appetite will probably decide that. #Crudeoil prices sink on worries about oversupply. https://www.dailyfx.com/forex/market_alert/2019/10/21/Gold-Prices-Find-Support-In-Brexit-Turmoil-US-China-Trade-Uncertainty.html?utm_source=Twitter&utm_medium=Cottle&utm_campaign=twr
  • Join @DavidCottleFX 's #webinar at 4:00 AM ET/8:00 AM GMT for your weekly update on the top Asia Pacific market drivers that traders should watch this week. Register here: https://t.co/HNf3Axw8s5 https://t.co/xApzkcobSR
  • Indices Update: As of 07:00, these are your best and worst performers based on the London trading schedule: US 500: 0.23% Wall Street: 0.20% Germany 30: 0.08% France 40: -0.03% View the performance of all markets via https://www.dailyfx.com/forex-rates#indices https://t.co/fupnm3hipk
  • European Opening Calls from IG: #FTSE 7165 +0.20% #DAX 12666 +0.26% #CAC 5646 +0.18% #MIB 22387 +0.29% #IBEX 9348 +0.20% #STOXX 3588 +0.23% #SA40 49591 +0.16%
  • EUR Germany Sep PPI MM: Actual: 0.1% Forecast: -0.1% Previous: -0.5% YY Actual: -0.1% Forecast: -0.2% Previous: 0.3%
  • Markets believe that the European Central Bank @ecb will ease policy this year. This could be very bad news for the Swiss National Bank, but it’s not clear that it will resort to old remedies. Get your market update from @DavidCottleFX here: https://t.co/jZV0Ytw6Db https://t.co/KXULyswial
  • Japan’s All Industry Activity Index (MoM) (AUG) Actual: 0.0% Est: 0.1% Previous: 0.2% #JPY
  • IG Client Sentiment Update: Our data shows the vast majority of traders in Ripple are long at 96.04%, while traders in Germany 30 are at opposite extremes with 78.78%. See the summary chart below and full details and charts on DailyFX: https://www.dailyfx.com/sentiment https://t.co/cCfWKn4CzA
Here's How to Validate and Trade a Channel

Here's How to Validate and Trade a Channel

2012-03-15 03:00:00
Richard Krivo, Trading Instructor
Share:

Think of a trading channel as a horizontal trading range being turned at an angle. Where the range is trading between relatively defined levels of support and resistance over time, the angular channel is either making higher highs (ascending channel) or lower lows (descending channel) as price action moves on the chart.

On the charts below are examples of both ascending and descending trading channels…

Here's How to Validate and Trade a Channel

Here's How to Validate and Trade a Channel

By looking at both of these channels, one can readily see the similarities between a channel and a range that was mentioned earlier. Just as in range trading, the lower channel line is considered support and the upper channel line is considered resistance.

Given that, as you might suspect, some of the same trading rules will apply.

However, before we begin actual trading, we must be certain to validate the channel. To accomplish this we will use the “Three Touch Rule”.

In other words, price action must come into contact with the lower channel three times before a long position can be taken. Also, before a short position can be taken, price action must come into contact with the upper channel line at least three times.

The rationale behind the three touches is that any two points on a chart can be connected by a straight line. Those two touches may be the beginning of a valid line or they may turn out to be nothing. However, if three points on a chart can be connected by a straight line, now we know that that particular price level is providing support or resistance. It is not as random as a line created by only two points.

Let’s take a look at the 4 hour chart of the GBPUSD descending channel for an example of this rule…

Here's How to Validate and Trade a Channel

In the case of the chart above, a trader could take a short position on this GBPUSD pair after price tests the upper channel line (resistance) for the third time. Since the channel is descending and the daily trend on this pair is to the downside, shorting the pair is the higher probability trading scenario.

While some aggressive or impatient traders may take a trade after two touches, personally I prefer to wait for the greater confirmation that the third touch provides. (Keep in mind that greater confirmation is simply that: confirmation. It is not a guarantee that the trade is going to work out.)

I also want to point out that on the chart above that there are several places along the channel lines at which several candles come into contact with the channel line at virtually the same point…the second touch on the upper channel line for example. In a case such as that, that would count as a single touch. We want to see a touch occur and then have price action pull away and then come back and test the same level again. That will provide the greater validity that we are seeking.

Let’s use the 4 hour chart of the NZDUSD ascending trading channel for an example of how to enter a trade and place our stops and limits…

Here's How to Validate and Trade a Channel

So in the case of this ascending trading channel, a trader could go long after the third touch of the lower channel by price. Price is respecting the support presented by the lower channel line. We can see that the two candles within the red rectangle and just above the word Stop have “wicked below” the channel line but have not closed below it. That is a good indication that a long position can be taken with a stop placed just below those two wicks.

The timing of our entry into this trade can be determined by the candlesticks that are forming along the lower channel line and/or an oscillating indicator such as Stochastics, MACD, RSI, etc.

In channel trades such as the one above, I prefer to set my limit just below the upper channel line. This is denoted by the red line labeled Limit. I do this since oftentimes price will move in the direction of the trade but it can fall just short of the upper channel line…as it did here. In this case, I would have captured perhaps 80-90% of the move which is just fine with me.

Next: How to Use Trendline Support or Resistance to Enter a Trade (31 of 47)

Previous: How to Trade Trendlines

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.