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One Way to Trade Market Channels

April 08, 2012 | Comments: 0 | Views: 85

The old adage "The trend is your friend" has some merit. Forex markets do tend to trend more than other markets, but the fact of the matter is that most of the time, the markets are range bound or in a channel. If the range from the high to the low of the channel is too narrow, it is usually wise to avoid trading until the situation changes. However, if the channel has a sufficiently wide range, it presents a very trade-able situation.

The theory is simple. When price is at the lower end of the range (the channel bottom), you buy and when the price is at the high end of the range (the channel top), you sell. Easy, right?

The first thing to do is determine how the channel is to be constructed. The easiest and most common way to do this is to simply draw a line connecting the highest high prices and a line connecting the lowest low prices. These lines should be roughly parallel and not sloping more than about twenty degrees up or down. Channels with higher slopes are good indicators for entering prevailing trends or spotting trend reversals but not for the kind of trade covered here.

The distance from the top of the channel to the bottom must represent a range sufficient to be traded. Personally, I look for a range of about forty pips from top to bottom. If the range is less than forty pips I wait for the breakout trade. A simple entry technique would be to sell at the top and to buy at the bottom using very tight stops. However the slightest bit of market noise could stop out my trade before it has a chance to work.

I prefer to have some confirmation before entering the trade. I do this using a shorter time frame. For example, if the market is at the top of the channel on a fifteen minute chart, I'll switch to a one minute chart and enter my sell trade on a MACD crossover which signals a sell. I will then go back to the fifteen minute chart of monitor my trade. My profit target is set twenty percent of the channel range above the bottom of the channel. Remember the adage "Bears can win & Bulls can win. Pigs get slaughtered." One caveat: Do not enter the trade if the market has gone more than a quarter of the way to the bottom of the channel.

For stops I calculate the distance from the top of the channel to my sell entry. I then double that distance, add that number to my entry price and use the resultant price as my stop (adding pips for the spread).

If the market is at the bottom of the channel on the fifteen minute chart, I'll switch to a one minute chart, and enter my buy trade on a MACD crossover signaling a buy. As before I revert to the fifteen minute chart to monitor the trade and the stop loss is placed based on subtracting twice the difference between my entry and the channel bottom from the entry price. However, the trade is not entered if the price has moved more than one quarter of the way to the top of the channel.

Many traders would place the stops almost immediately outside the channel lines. The reason I use the method described is that it gives extra room for market noise which might otherwise take me out of the trade prematurely.

Trading channels is a relatively high probability approach and is available most of the time. It may not be the same as catching the monster trend but a profitable trade is always a good thing in my book.

James Mason is an active currency trader who teaches forex trading through individual consultation and in a live trading room. For more information go to

Source: EzineArticles
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Currency Trading




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