How to Use the Price Channel Pattern to Gain More Profits
The Price Channel Pattern trading strategy is one of the smartest ways to make money while trading. Also, 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.
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The good news about the Price Channel Pattern is that most financial instruments and markets trade within a price channel of at least 20% to 25% of the time.
To understand the psychology of a chart pattern, please read our article “Chart Pattern Trading Strategy Step-by-step Guide.” Our team at Trading Strategy Guides is working hard to compile the most comprehensive guide on different chart pattern strategies.
Table of Contents
A Strategy Designed for Everyone!
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 Price Channel strategy will fit your needs.
When studying price charts, you’re better off using channels rather than a simple trendline. This is a more robust and fair way to gauge what the price is doing. You’re looking to determine upward and downward price limits that contain the price.
Also, feel free to read our article on “Trader’s Tech and Installing MT4 EAs with Indicators.”
Moving forward, we will discuss what makes a good Price Channel Pattern. We will also 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. Now, you might know that the price action is contained between these two parallel trendlines.
Moreover, the separation between the two trendlines must be wide enough 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 the 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 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 professional traders use.
Two horizontal lines can define the sideways Price Channel Pattern as opposed to using trendlines. When we have a consolidation or ranging zone, the price bounces on and off between the two lines of support and resistance.
Using a Price Channel 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 significant 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 smart money will eventually target the stops. 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.
How to Use the Price Channel Trading Strategy – Sell Rules
Recognizing the signs of the Price Channel breakout in advance allows you to make better trading decisions. Our Price Channel strategy takes advantage of these warning signs. It provides you with an intelligent way to trade Price Channels.
Moving forward, we present the sell-side rules of the Price Channel trading strategy.
Step #1: The Process of Drawing a Price Channel
Draw a Price Channel if you can 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 can spot two consecutive swing highs followed by two consecutive higher lows, you simply connect these points using the Price Channel tool.
Most trading platforms have incorporated the Price Channel indicator into their default trading tools.
Before the Price Channel breakout, we need to ensure that our Price Channel trading strategy complies with one more rule, which brings us to the next step.
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 pattern presents itself when the last swing high point fails to reach the top of the channel.
Only our Price Channel trading strategy uses this powerful price reading technique because our team at Trading Strategy Guide has developed the “early signs” of Price Channel breakout.
The failed attempt to test the top of the Price Channel again 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 make when trading price channel patterns is not waiting for a confirmation signal when the breakout happens.
You should always wait for breakout confirmation! What do we mean by breakout confirmation?
Simply put, 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 if you’re interested.
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 straightforward 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 gives us an entry signal that you can confidently execute the trade. Now, the next logical thing we need to establish for the Price Channel trading strategy is where to take profits.
Step #5: Where and How to Take Profit Using This Strategy
Take profit one at the 50% Fibonacci Retracement of the previous trend, and take profit two at the starting point of the Price Channel.
This trading strategy uses 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?
Well, that’s 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 profit zone is the Price Channel starting point (see the above figure). Now, the next important thing we need to establish is where to place your protective stop loss.
Step #6: Placing a Protective Stop Loss
Make sure to place the protective stop loss above the swing high before 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 before the Price Channel breakout.
We also recommend that you 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. You can use the same rules, but in reverse, for a BUY trade. This time, we’re going to use the downward Price Channel. In the figure below, you can see an actual BUY trade example using this trading strategy.
Conclusion
You can use the Price Channel Pattern to profit in any kind of market. Also, you can incorporate the trading techniques highlighted in this Price Channel trading strategy 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 are when the price falls to reach one end of the Price Channel Pattern multiple times. This is a warning to the potential ending of this pattern.
Suppose you have good trading skills and can spot the Price Channel Pattern earlier. In that case, it will allow you to take advantage of the price bounce between the support and resistance lines.
If you’re curious about learning more price chart pattern strategies, make sure to check out our Bump and Run chart pattern strategy guide.
Thank you for reading!
Please leave a comment below if you have any questions about this strategy!
Thanks a lot
priceless info , I hope to apply them in correct way
Glad you enjoyed it, Rahman!
Very simple to understand technique. Thank You very much. Just one question, what is the best TF to trade using the channel strategy ?
Great explanation and very easy to understand, thank you Rahman.
No problem!
Great read. Is there any software that you are aware of that will allow you to set the the Price Channel and send out alerts when the Price Channel gets broke?
Everything is very open with a really clear description of theissues. It was truly informative. Your website is very helpful.Thanks for sharing!
Wow, marvelous blog layout! How long have you been blogging for? you made blogging look easy. The overall look of your web site is magnificent, let alone the content!
You are a very bright individual!