Channel Trading Strategy Guide – Master Channel Trading 2023

We want to introduce you to a powerful Channel Trading Strategy that can significantly enhance your trading skills. This strategy focuses on identifying and profiting from price movements that deviate from the usual price action pattern.

Instead of sticking to the traditional channel, we will teach you how to navigate the market and take advantage of potential profit opportunities by exploring what we call the “rabbit trail.”

Before we begin, thanks for visiting Trading Strategy Guides

Whether new to trading or a seasoned professional trader, we hope to equip you with the knowledge and tools to execute the best channel trading strategy.

Let’s begin!

Intro — Ultimate Channel Trading Strategy

This comprehensive guide includes a channel trading system, that applies technical analysis techniques to maximize potential profit from a channel breakout.

Let’s start by going over the basics.

What is a channel?

A channel is simply a price movement that uses support and resistance in the past to validate what it will do in the future [1]. 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 price channel on the charts.

Now that we know what a channel looks like let’s look at the different types of channel patterns for this forex channel trading strategy.

There Are Three Different Types of Channels:

Ascending Channel

Descending Channel

Horizontal Channel

There need to be at least two support and resistance levels to validate a channel! The more there are the better the signal.

The support and resistance points are marked in 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.

Note: If you are completely new to this type of trading dive into some charts and practice some channeling work. Simply go back in time on the charts and draw some channels yourself. If they match what you see above, perfect! Keep doing them! Once you’ve done 100 or so it should be fresh on your mind and you will be ready to master the channel trading strategy.

Channel Trading Strategy Rules

Now that you are the master of channels let’s look at the rules of what this strategy is all about…

Rule #1: Draw a channel on a 1-hour chart.

The obvious first step in a channel trading strategy is to find a channel. We recommend using a four-hour or one-hour chart. In this example, we are using the 1-hour. Remember there must be two resistance and support points to validate a channel.

Simple, Right?

This strategy can be used with many instruments across most financial markets. Go through some of your favorite instruments and start drawing channels. There are literally channels everywhere.

Below is a prime example of a horizontal channel. It is AUDNZD drawn on a 1-hour chart.

Not too bad, all you are doing here is drawing parallel lines to mark the channel.

Rule #2: Identify When There Is a Breakout.

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.

See below, the breakout candle is marked. Here is an example of a master candle setup.

This breakout happened on the top of the channel. So that means you will look to BUY.

If the breakout happens on the bottom of the channel then you will look to SELL.

Great! We have a 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 a 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.

If you would have entered this trade right when it broke out you would soon have been 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 might not have burned you, but countless other trades would have!

Rule #4 After Pull Back, Make Entry.

Our lines are drawn, we identified the breakout and waited for the pullback. It is now time to make our trade.

The criteria to make an entry after a pullback 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 pullback.

If it is a SELL trade we want to see TWO bearish (down) candles after the pullback.

In the example below, we would need to see two green bullish candles after a pullback to enter a trade.

Below is where we would enter.

Enter after the two bullish 15-minute candlesticks close.

You may be thinking, “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 of 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. Stop loss placement is relative so it can’t be measured in a specific number of pips.

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 Trend

The last thing you need to do is know when to exit.

This strategy goes for a 50-pip target.

The rabbit trail could take 2 hours, or it 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!

Conclusion — Best Channel Trading Strategy

The Channel Trading Strategy is a valuable tool for any trader looking to increase their profitability. By learning to identify trends and looking for channel breakouts, traders can take advantage of market movements and make more informed trades.

Remember, trading requires discipline and patience. Keep refining your skills, practicing good risk management, and always be open to new ideas and strategies.

To Learn Another strategy, check out the trend-following strategy article here.

Thank you for reading!

Please leave a comment below if you have any questions about The Best Channel Trading Strategy!

Further Reading

If you found this channel trading strategy useful, we suggest reading these articles to expand your knowledge:

• Prop Trading: Discover the benefits of prop trading and how it can help you achieve financial stability.
• Trading Basics: Learn about the different financial markets, their distinctions, and how to trade them.
• Forex for Beginners: Get familiar with the fundamentals of forex trading and become a pro forex trader.
• Risk Management Formula: Sharpe ratios can provide insights into managing risk with your trading strategy.
• Forex Day Trading: Learn the art of day trading forex and how to become the professional trader you always wanted to be.

Channel Trading Strategy Video Training

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Channel Trading Strategy PDF

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Click here to get your copy of this Free strategy today.

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Sources Cited

Corporate Finance Institute

Frequently Ask Questions