Part of what makes a good forex trading strategy is the ability to use simple things to good effect. One of those simple but often overlooked ways of profiting from the forex market is using channels to trade forex. What are the channels?
Channels in forex are parallel lines which are drawn to connect the lows and the highs of the price action. The upper trend line connects the highs and the lower trend line connects the lows. In order to qualify as a trendline, that line must touch at least three points at which the candlesticks make highs and lows along the way. The two lines so drawn now represent the resistance and support levels within which the currency pair has traded in the period of time in review.
Suppose Chart showing channel of the ascending variety,
There are three varieties of channels:
Ascending channel (up channel)
Descending channel (down channel)
Whatever the variety of the channel in question, there is always an opportunity to buy and to sell a currency pair, with the buying opportunity occurring at the lower trend line (the support) and the selling opportunity occurring at the upper trend line (resistance).
Suppose Chart showing the buying and selling parts in a descending channel
The chart shows it as it is. The buying and selling points are very visible here.
There are some key points to note when using channels to trade. Firstly, the trader must ensure that the trend lines touch at least 2 to 3 points on the way. A good way to draw the channels on the MetaTrader4 platform is to use the channel drawing tool on the terminal.
The second point to note is that the trader has to be constantly aware of the fact that the channel can be broken at any time. As such, the trader has to be on the alert all the time for any events that could cause the price action to break the trend line support or resistance levels.
Channels work best when there are reversal candlesticks at the trend line points. When there is a candle that follows the pattern of the trend and this candle closes beyond the trend line, it is a signal that the reversal will not occur and the price action will continue. We see this at the break of the upper trend line in the diagram above after two successive reversals.
Use a demo platform to master how to trade with channels. They are a good tool to drive in some nice pips without stress.