Trade with Price Channel Pattern Strategy
The Price Channel pattern trading strategy is one of the smartest ways to make money trading. The Price channel pattern is one of the most intuitive and easiest chart patterns. This article will teach you how to implement it in your day to day trading operations.
The good news about the Price channel pattern is the majority of financial instruments and markets trade within a price channel of at least 20% - 25% of the time.
In order to understand the psychology of a chart pattern, please start here: Chart Pattern Trading Strategy step-by-step Guide. Our team at Trading Strategy Guides is working hard to put together the most comprehensive guide on different chart pattern strategies.
It doesn’t matter whether you’re a scalper or a day trader. If your preferred time frame is the daily chart for swing trades, the Channel trading strategy will fit all of your needs.
When studying price charts, you're better off using channels rather than a simple trendline. This is a more powerful and fair way to gauge what the price is doing. This is because you’re looking to determine upwards and downwards price limits that contain the price.
Also read about Trader's Tech and Installing MT4 EAs with Indicators.
Moving forward, we’re going to discuss what makes a good Price Channel Pattern. We're going to lay down a few notes about the psychology behind the Price Channel chart pattern.
What is the Price Channel Pattern?
The Price Channel pattern represents two trend lines positioned above (channel resistance) and below (channel support) the price. The price action is contained between these two parallel trendlines.
The separation between the two trendlines needs to be wide enough if you want to trade inside the Price Channel Pattern. If this is the case, you can buy at the channel support level and sell at the channel resistance level.
However, the biggest trading opportunity comes from the Price Channel Breakout.
When the Price Channel Breakout happens, it can produce significant price movement in the direction of the breakout.
We can distinguish two types of Price Channel Patterns:
- Upward Price Channel
- Downward Price Channel
- Sideways Price Channel
An upward Price channel pattern occurs when the price makes a series of higher highs followed by a series of higher lows. The price should be contained within the support and resistance lines.
When price breaks out either above or below a buy or sell signal is triggered.
An upward Price channel pattern occurs when the price makes a series of lower lows followed by a series of lower highs. Typically the price should be contained inside the lines that connect these highs and lows.
The best trading opportunity comes from the Price Channel breakout.
Since we’re at the trade breakout topic we recommend you learn some of the trade tactics used by professional traders here: Breakout Trading Strategy Used by Professional Traders.
The sideways Price Channel Pattern can be defined by two horizontal lines as opposed to using trendlines.
Basically, when we have a consolidation or ranging zone, where the price bounces on and off between the two lines – support and resistance.
Using a Channel trading strategy means you can easily identify trade ideas for big profits.
The Psychology behind the Price Channel
If you understand the psychology behind the Price Channel breakout you can potentially save many losing trades. The reason why the Price channel breakout can pose a major shift in direction is because many traders trade inside the channel. They place their stop loss above and below the Price Channel pattern.
Then, as more stops gather above and below the Price Channel Pattern, the stops will eventually be targeted by the smart money. This is because they need the liquidity the stops provide.
It’s important to remember that a price channel won't last forever. The price channel breakout is inevitable.
Now, let’s see how you can effectively trade with the Price Channel Trading Strategy. You will learn how to make profits without using a technical indicator.
Price Channel Trading Strategy – Sell Rules
Recognizing the signs of the Price Channel Breakout in advance gives you the opportunity to make better trading decisions. Our Price Channel Trading Strategy takes advantage of these warning signs. It provides you with a smart way to trade Price Channels.
Moving forward, we present the sell-side rules of the Price Channel trading strategy:
Step#1: Draw a Price Channel if you are able to see at least two Higher Highs and Higher Lows. The Price Channel pattern is drawn by connecting the highs and lows.
During this stage, we’re looking for distinctive price action that can be contained within two parallel lines. These lines will ultimately form the Price Channel Pattern.
If you’re able to spot two consecutive swing highs followed by two consecutive two higher lows you simply connect these points using the Price Channel tool.
The majority of the trading platforms has incorporated into their default trading tools the Price Channel indicator.
Before the Price Channel breakout, we need to make sure our Price Channel trading strategy complies with one more rule, which brings us to Step #2.
Step #2: Wait for a Swing High to fail to reach the top of the Price Channel pattern.
In the case of an ascending or upward Price Channel pattern the first warning signal that the price will fail to trade within the boundaries set by the Price Channel Pattern presents itself when the last swing high point fails to reach the top of the channel.
Only our Price Channel trading strategy makes use of this powerful price reading technique because our team at Trading Strategy Guide has developed the “early signs” of Price Channel breakout.
The fail attempt to test again the top of the Price Channel is a sign of price weakness which is confirmed when the price also fails to bounce off the Price Channel bottom and breaks it instead.
Note* - The more times a swing High fails to reach the top of the Price Channel pattern the better the trade setup
Step #3: Wait for the Price Channel breakout and for breakout confirmation
One of the worst mistakes traders does when trading Price Channel patterns is that they don’t wait for confirmation signal when the breakout happens.
You should always wait for breakout confirmation!
What do we mean by breakout confirmation?
In simple terms, we want the breakout candle to post a close below the Price Channel bottom to confirm the breakout. We also have training on How to use Japanese Candlesticks.
So we don’t just wait for the Price Channel breakout, but instead, we also want to see the breakout candle closing below the Price Channel pattern. This is a very simple way to avoid many of the false breakout signals.
Note* - The breakout candle needs to be a big decisive looking candle, but it’s not mandatory
So far, so good.
Now we need to define our entry technique which brings us to the fourth step of the Price Channel trading strategy.
Step #4: Sell right at the Breakout Candle Closing Price
The Price Channel trading strategy uses a very simple trade entry technique.
A sell order is triggered at the breakout candle closing price.
The Price Channel breakout technique provides us with an entry signal that you can be confident in executing the trade.
The next logical thing we need to establish for the Price Channel trading strategy is where to take profits.
Step #5: Take Profit 1 at the 50% Fibonacci Retracement of the previous trend, Take Profit 2 at the starting point of the Price Channel
The Price Channel trading strategy employs multiple entry techniques.
Our first potential take profit zone is the 50% Fibonacci retracement of the previous trend.
What do we mean by the previous trend?
The trend that was contained within the Price Channel pattern. So plot the Fibonacci retracement indicator between the high and the low of the price channel.
The second potential take profit zone is the Price channel starting point (see in the above figure).
The next important thing we need to establish is where to place your protective stop loss.
Step #6: Place the protective stop loss above the swing high prior to the Price Channel breakout
We’re adopting a very conservative approach when it comes to the stop loss technique. Simply hide the stop loss above the swing high prior to the Price Channel breakout.
We also recommend you to trail your stop loss above the last swing high once you cash in on the first portion of the trade.
*Note: The chart above is an example of a SELL trade… Use the same rules – but in reverse – for a BUY trade, but this time we’re going to use the downward Price Channel. In the figure below, you can see an actual BUY trade example, using the Price Channel trading strategy.
You can use the Price Channel pattern to profit in any kind of market. The trading techniques highlighted in this Price Channel trading strategy can also be incorporated into your current strategy as it will bring a new dimension to your understanding of price action.
The early signs that a Price Channel breakout is about to happen is when the price falls to reach multiple times one end of the Price Channel pattern. This is a warning to the potential ending of the Price Channel pattern.
If you have good trading skills and you’re able to spot the Price Channel pattern earlier, it will give you the opportunity to take advantage of the price bounce between the support and resistance lines.
Read our previous price chart pattern here: Bump and Run Chart Pattern.
Thank you for reading!
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