subject: Channel Trading [print this page] Channel Trading Channel Trading
A Channel is formed when we draw a trendline and then a line parallel to the trendline with most of the price action if not all falling between the two lines. By scanning through a few charts, you will find that it is easy to identify channels. Channels occur frequently.However, currencies rarely stay in a narrow range for long and have a tendency to breakout from a tight range and develop a strong trend in the market. Important economic news releases can act as a trigger for a breakout.A common scenario can be a channel formed just prior to the release of an important US economic data. The chances of a breakout under such a scenario would be high. So, this simple channel breakout trading strategy entails looking for a narrow channel formed prior to some fundamental market event like the release of an important economic data. It can also be used to identify a channel formed just prior to the open of a major financial center like the London Open.For this channel breakout trading strategy to work, you should first identify the channel on an intraday chart like 5 minutes, 15 minutes, 30 minutes charts etc prior to the announcement of a major fundamental news in the market. Price action should be contained within a narrow range.When the economic news release is made, price action will breakout in either the up or down direction. In case of a breakout in the up direction, enter long. Place the stop loss 10 pips below the upper channel line. And in case of a breakout in the down direction, enter short with a stop loss 10 pips above the lower channel line. Take profit at double the channel range!You can use another version of this Channel Breakout Strategy by entering both long and short entry order 10 pips above the upper channel line or 10 pips below the lower channel line.Now, in case of a breakout in the upward direction, long entry order will be triggered. Place stop loss immediately 10 pips below the upper channel line and use a trailing stop in case the upward move continues. Similarly, if the breakout takes place in the down direction, entry order to go short will be triggered. Immediately place a stop loss 10 pips above the lower channel line and take profit at double the channel range or use trailing stop in case it develops into a major down move.
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