25# Channel Strategy Trading System

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Channel trading is less exotic but nevertheless works very well with currencies.

The primary reason is because currencies rarely spend much time

in tight trading ranges and have the tendency to develop strong trends. By

just going through a few charts, traders can see that channels can easily

be identified and occur frequently. 

 

A common scenario would be channel

trading during the Asian session and a breakout in either the London or the

U.S. session. There are many instances where economic releases are triggers

for a break of the channel. Therefore it is imperative that traders keep

on top of economic releases. If a channel has formed, a big U.S. number is

expected to be released, and the currency pair is at the top of a channel,

the probability of a breakout is high, so traders should be looking to buy

the breakout, not fade it.


Channels are created when we draw a trend line and then draw a line that is parallel to the trend line. Most if not all of the price activity of the currency pair should fall between the two channel lines. We will seek to identify situations where the price is trading within a narrow channel, and then trade in the direction of a breakout from the channel. 

This strategy will

be particularly effective when used prior to a fundamental market event

such as the release of major economic news, or when used just prior to the

open of a major financial market.

Here are the rules for long trades using this technique.

1. First, identify a channel on either an intraday or a daily chart. The price

should be contained within a narrow range.

2. Enter long as the price breaks above the upper channel line.

3. Place a stop just under the upper channel line.


4. Trail your stop higher as the price moves in your favor.

Examples

Let us now examine a few examples. The first is a USD/CAD 15-minute chart shown in Figure . The total range of the channel is approximately

30 pips. In accordance with our strategy, we place entry orders 10 pips

above and below the channel at 1.2395 and 1.2349. The order to go long

gets triggered first and almost immediately we place a stop order 10 pips

under the upper channel line at 1.2375. USD/CAD then proceeds to rally

and reaches our target of double the range at 1.2455. A trailing stop also

could have been used, similar to the ones that we talked about in our risk

management section in Chapter 8.

The next example, shown in Figure 9.23, is a 30-minute chart of

EUR/GBP. The total range between the two lines is 15 pips. In accordance

with our strategy, we place entry orders 10 pips above and below the channel

at 0.6796 and 0.6763. The order to go long gets triggered first and almost

immediately we place a stop order 10 pips under the upper channel line at

0.6776. EUR/GBP then proceeds to rally and reaches our target of double

the range at 0.6826.

Figure 9.24 is a 5-minute chart of the EUR/USD. The total range between

the two lines is 13 pips over the course of four hours. The channel

actually also occurs between the European and U.S. open ahead of the U.S.

retail sales report. In accordance with our strategy, we place entry orders

10 pips above and below the channel at 1.2785 and 1.2752. The order to go

short gets triggered first, and almost immediately we place a stop order 10

pips above the lower channel line at 1.2772. The EUR/USD then proceeds to

sell off significantly and hits our target of double the range of 26 pips. More

 

 aggressive traders also could have trailed their stops to take advantage of

what eventually became a much more extensive move lower.

This Strategy Write by kathy Lien “Day Tading and Swing Trading the Currency Market,136-138.) 

 

 

 

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