This Channel Trading Strategy can be a huge difference maker in your trading arsenal. In this article, I am going to show you why going off on “rabbit trail” is not such a bad thing after all! I will also show you a forex channel trading system, trend channel trading strategy, fx analysis, and much more in this article. Also read about the Trail stop loss in Forex.
This strategy is all about taking advantage of the price movement that is moving away from the normal price action.
When I say the “norm” I am referring to what we call a channel. We want to escape this channel and enter on our rabbit trail to pip glory! Here is another strategy called The PPG Forex Trading Strategy.
Fantastic! Now let’s look at some of the basic information we need to get started...
Our Most Advanced Channel Trading Indicator!
What is Channel Trading and Why Is It Important for This Strategy?
A channel is simply a price movement that uses support and resistance in the past to validate what it will do in the future. The price movement will hit these points (resistance or support) and “bounce” back into the channel.
Kind of like skid marks on a road...
It goes back and forth but never exits the area.
This type of movement creates a channel on the charts.
Now since we know what a channel looks like let’s look at the different types for this forex channel trading strategy.
There Are Three Different Types of Channels:
There needs to be at least two support and resistance levels to validate a channel!
The support and resistance points are marked on the pictures above.
You can see in the three examples above that they all have at least 2 levels of each.
When constructing these channels, ALWAYS remember that both lines need to be parallel to each other. Do not force trend lines to look like a channel. If they aren’t parallel then it is clearly not a channel that formed.
Helpful information: If you are completely new to this type of trading dive into some charts and do some channel work. Simply go back in time on the charts and draw yourself some channels. If they match what you see above, perfect! Keep doing them! Once you did about 100 of these it should be fresh on your mind and you will be ready to master a trading strategy that mainly focuses on these channels.
So now since you are the master of channels let’s look at what this strategy is all about...
Rule #1: This Channel Trading Strategy Requires You To Draw a channel on a 4 hour or 1-hour chart.
The first thing you need to do to get this strategy started off is you need to find a channel on a four hour or one hour chart. Remember there must be two resistance and support points to validate a channel.
This strategy can use many currency pairs. Make sure you search through all of them. Do not get caught up in only trading one currency pair. Many say that they “only trade EURUSD.” Why limit yourself to just one pair? Get in the charts and see for yourself! There are channels everywhere. This strategy will work with any currency pair. The opportunities are endless...
Sorry for that rabbit trail, let’s get back to this strategy!
So below is a prime example of a horizontal channel. This is AUDNZD chart taken on a 60-minute time frame.
Not too bad. So basically all you are doing here is drawing parallel lines.
I added the color where the channel is highlighted. Just as long as both of your lines are parallel to each other.
Rule #2 Identify If there is a Breakout of a channel on a 1 hour chart.
The way you find the trade is to find a breakout of the channel. In a perfect world, the support and resistance levels will hold on forever..
But the world isn’t perfect..
So that’s why we have what is called a breakout.
Below the breakout candle is marked. This was taken on a one hour chart. In this strategy the one our chart we use to find a breakout. Here is an example of a master candle setup.
This breakout happened on the top of the channel. So that means you will BUY.
If the breakout happens on the bottom of the channel then you will SELL.
Great! We have breakout candle let’s get in the trade and follow the rabbit trail to pip glory!
Not so fast..
Rule #3 Wait for a Pull Back on a 15-minute Chart.
Why wait? Because the market is a money grabbing machine, and they want your hard earned cash!
You wait because sometimes the market does a “head fake” and turns against you.
Look at the example below for proof of this.
So if you would have got in this trade right when it broke out of the channel you would soon have got stopped out.
That is why it is so important to Wait for it to pull back.
So back to our original example, you see below the pullback we are talking about.
This is where many people struggle. They see that it broke out so they want to click BUY or SELL right now!!!
Think about the sayings you have heard since you were a child, “Patience is a Virtue,” Or “Good things in life take Time”
Just be patient and wait…
This trade would not have burned you, but countless other trades would have!
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Rule #4 After Pull Back, Make Entry.
We are getting so close to getting on our rabbit trail to make some serious pips!
Our lines are drawn, we identified the breakout, and waited for the pull back. It is now time to make our trade.
The criteria to make an entry after a pull back on a 15 minute chart to enter a trade is that there must be two 15-minute candles that support our trade.
If it is a BUY trade we want to see TWO bullish (up) candles after the pull back.
If it is a SELL trade we want to see TWO bearish (down) candles after the pull back.
In our example we are using we would need to see two green bullish candles after a pull back to enter a trade.
Below is where we would enter.
Enter after the two bullish 15 minute candlesticks close.
You may be think oh no! The trade went the wrong way, get out now!
We are not worried about that because our strategy told us that the breakout occurred and we are moving up!
Rule #5 Stop Loss Placement
This is probably one of the most important rules of the strategy.
You always need to place a stop loss somewhere for a reason. If you are throwing in stop losses 5 to 10 pips from your entry order just because someone told you to do it, then you are without a doubt treading some dangerous waters.
In a Buy The stop loss will be placed in the channel below the last support point.
In a SELL The stop loss will be placed in the channel above the last resistance point.
In our example, you can see where the stop loss was placed.
That way if it does come back in the Channel it will hit the support level and end up going back up in a bullish movement.
Rule #6 Ride The Rabbit Trail to 50 pips using this Channel Trading Strategy!
The last thing you need to do is know when to exit.
This strategy goes for a 50 pip target.
The rabbit trail maybe 2 hours, or could take as long as two days.
Stay in the trade and remember your rules. You are going for a 50 pip breakout trade!
So to recap, here is what needs to happen in order for you to enter a trade:
Rule #1: Draw a channel on a 1 hour chart.
Rule #2 Identify If there is a Breakout on 4 hour or 1 hour chart.
Rule #3 Wait for a Pull Back on a 15 minute Chart.
Rule #4 After Pull Back, Make Entry.
Rule #5 Find a Stop Loss Placement.
Rule #6 Ride The Rabbit Trail to 50 pips!
Hope you find great success with this strategy and always remember to only be risking no more than 2% of your account at a time. If you have any feedback about this strategy please leave us a comment or you can reach us at firstname.lastname@example.org
To Learn Another strategy, check out the trend following strategy article here.
Thank you for reading!
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