Forex Strategies Resources

17# Bollinger Bands and Equidistant Channel Trading System

Submit by joy22

 

Time Frame 5min or higher

Currency pairs: all

Indicators:

Equidistant Channel;

Bollinger MACD (12,26,9);

Bollinger Bands (20, 2)

 

The Equidistant Channel represents two parallel trend lines connecting extreme

maximum and minimum prices. Volatility in the market causes the price to jump,

drawing peaks and troughs forming the channel in the direction of the trend.

Early identification of a channel can give valuable information about the trend direction which allows traders to take advantage. In this trading system we will use the Equidistant Channel to determine the direction in which we will be looking to enter trades.


HOW TO DRAW AN EQUIDISTANT CHANNEL:

To draw the equidistant channel using the MT4 platform simply click on Insert. From the menu click on Channel then select Equidistant from the submenu. See image below:

 

Once you have selected the Equidistant Channel drawing tool, you may begin drawing

the channel on your chart. Click the left mouse button on your starting point on the

chart.

Hold the mouse button down and draw the channel in the necessary direction. Once

you have reached the end point release the mouse button and the channel will appear

on the chart. You can now select the parallel line and drag it to the most extreme high or

low point depending on the direction of the channel. The direction in which you draw the

channel depends on wheher the candles are going higher or going lower.

EXAMPLES:

On the image below you can see that from Point A onwards the new candles being

formed are getting higher. This currency pair is in an upward trend so in this case we

draw an equidistant channel by connecting the most extreme Lows.

 

On the image above the most extreme Lows are at Point A and Point B. To draw a

channel we simply select the drawing tool, then click the left mouse button at Point A,

hold it down and drag it all the way up to Point B then release the button.

At this point the parallel line will be inserted on the chart at any random position. We

need to left click on the parallel line, hold the mouse button down and drag it to the most

extreme High. On the chart above, the most extreme High is at Point C.

Now that we have drawn the channel on our charts we can clearly see that the market is

in an uptrend. This means that we will only be looking for opportunities to enter Buy

trades.

NOTE: The Equidistant Channel only shows us the direction in which the market is

moving. Before entering a trade we must confirm the trend direction using the MACD

indicator then we can use the Bollinger Bands to determine exactly where to enter a

Buy trade. We will cover these steps in more detail in this report.

On the image below you can see that from Point A onwards the new candles being

formed are getting lower. This currency pair is in a downward trend so in this case we

draw an equidistant channel by connecting the most extreme Highs.

 

RULES FOR SELL TRADES:

1. The market must be in a downtrend. If new candles being formed on the chart

are getting lower, the currency is in a downward trend so we draw an equidistant

channel by connecting the most extreme Highs. After drawing the channel, click

on the parallel line, hold the mouse button down and drag it to the most extreme

Low to complete the channel.

 

2. MACD must be below the zero line.

3. If the first two conditions are met, wait for price to break through and close below

the Lower Bollinger Band then open a Sell trade.

4. Place a Take Profit of between 3-30 pips depending on the time frame.

5. Place a Stop Loss a few pips away from the most recent High or observe a

mental Stop Loss if you prefer.

NOTE: As an alternative, you may also choose to place a Stop Loss or exit the

trade manually when the price crosses above the Middle or Upper Bollinger

Bands or when price crosses above the upper Channel line.

Let’s take a closer look at an example of a Sell Trade:

 

As you can see, after Point A, the new candles being formed are heading downwards

suggesting that the market is in a downward trend. We then drew an Equidistant

Channel by joining the most extreme Highs from Point A to Point B.

Once the Channel appeared on the chart, we moved the parallel line to Point C to

complete the channel. As you can see the Channel is moving downwards. To confirm

the down trend, we look to the MACD and see that it is below the zero line.

We now have confirmation of a down trend so we are looking for potential sell trade

signal from the Bollinger Bands.

At the red, dashed vertical line, you can see that the price breaks through and then

closes below the lower Bollinger Band. We then opened a Sell trade shown by the

aqua, dashed horizontal line. The Take Profit level (green, dashed horizontal line) was

set 10 pips away and was easily achieved.

 

RULES FOR BUY TRADES:

1. The market must be in an uptrend. If new candles being formed on the chart are

getting higher, the currency is in an upward trend so we draw an equidistant

channel by connecting the most extreme Lows. After drawing the channel, click

on the parallel line, hold the mouse button down and drag it to the most extreme

High to complete the channel.

2. MACD must be above the zero line.

3. If the first two conditions are met, wait for price to break through and close above

the Upper Bollinger Band then open a Buy trade.

4. Place a Take Profit of between 3-30 pips depending on the time frame.

5. Place a Stop Loss a few pips away from the most recent Low or observe a

mental Stop Loss if you prefer.

NOTE: As an alternative, you may also choose to place a Stop Loss or exit the

trade manually when the price crosses below the Middle or Lower Bollinger

Bands or when price crosses above the lower Channel line.

 

 

As you can see, after Point A, the new candles being formed are heading upwards

suggesting that the market is in an upward trend. We then drew an Equidistant Channel

by joining the most extreme Lows from Point A to Point B.

Once the Channel appeared on the chart, we moved the parallel line to Point C to

complete the channel. As you can see the Channel is moving upwards. To confirm the

up trend, we look to the MACD and see that it is above the zero line.

We now have confirmation of an up trend so we are looking for potential buy trade

signal from the Bollinger Bands.

At the red, dashed vertical line, you can see that the price breaks through and then

closes above the upper Bollinger Band. We then opened a Buy trade shown by the

aqua, dashed horizontal line. The Take Profit level (green, dashed horizontal line) was

set 10 pips away and was easily achieved.

 

 

 

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