With a certain assumption, it can be argued that all price movements in the foreign exchange market take place within the framework of one channel or another. It all depends on what timeframe this channel is built on. This feature of the price movement is the basis of all channel strategies.
Forex channels, in principle, are self-sufficient and you can trade even without using additional tools. But most often, several confirmations of the received signal are used. For example, Fibonacci retracement levels, candlestick analysis, MACD divergences. Depending on how many additional signals are received, you can, for example, adjust the size of the working lot.
The Forex channel strategy provides for only 2 scenarios: the price will either bounce off the channel border or break through it. Different trading systems offer different criteria for rebound and breakout of the channel, and the rules for entering the market differ accordingly. It is also of great importance what type of channel is used in the trading strategy.
Forex channel strategy: types of channels and their features
Any trading terminal allows you to use several channels:
- equidistant channels;
- Fibonacci channels;
- linear regression channel;
- standard deviation channel;
- Moving averages shifted along the Y-axis can also be used as channel boundaries.
Equidistant channel can be attributed to the most common type. Despite the simplicity of construction, it has a high efficiency. In order to build an equidistant channel, you need to have 3 points (extremums on the price chart). A base line is drawn through 2 highs/lows, and the opposite border of the channel is drawn through the 3rd point. Forex channel strategy using this type of channels shows good results.
Fibonacci channels. Just as in the equidistant channel, the main line of the channel is set, but beyond the opposite channel boundary at a distance of 0.618; 1.0; 1.618 and 2.618 are parallel lines. In addition, a trader can set additional lines parallel to the channel at an arbitrary distance from its border.
Linear regression channel. To build it, a trader only needs to select a certain area on the chart, the channel will be built automatically. The distance from the center line to the channel borders corresponds to the maximum distance from the closing price to the center line.
The standard deviation channel converges with the linear regression channel. Only in this case, the distance between the center line and the channel boundaries corresponds to the standard deviation of the closing price from it. By the position of the price relative to the center line, one can judge the mood in the market.
Peculiarities of working on a channel strategy
Any forex channel strategy requires strict criteria for price breakout and rebound from the channel border. It is at this stage that most beginners make serious mistakes. As a rule, they take the chart touching the channel border as a rebound, and a small “puncture” of the channel as a breakdown. Of course, profitable trading with this approach is impossible.
It is possible to talk about the rebound from the channel border only after the candle that touched its border has closed. The significance of the received signal increases if the rebound is accompanied by a reversal candle combination (for example, bullish/bearish engulfing) and divergence on the indicator.
As for the breakdown of the channel, there are 2 ways to trade in this case. You can try to take a risk and enter the market directly at the moment of the channel breakdown, this approach is considered risky. It will be much more reliable to wait for a small rollback after a rapid breakdown and make a deal already on the retest of the broken channel. If the retest coincides with the Fibonacci retracement level, then the strength of the signal increases.
An example of concluding a deal using a channel strategy
In the considered example, the price has been moving within a descending channel throughout the month (built on h4). During this movement on a smaller timeframe, a number of channels with a lower rank can be identified, which can also be used for trading. To search for divergences, it was used with standard settings.
Any forex channel strategy starts with building a channel and tracking the price behavior within it. It will not be superfluous to build several channels at smaller time intervals. Then you need to track the behavior of the price when approaching the border of the channel. It must be remembered that priority is given to signals received on a higher timeframe.
If the price touched the channel and closed inside it, then a rebound is possible. You can enter the market if at least 1-2 confirming signals are received (divergence, candle combination). The SL level is recommended to be set beyond the nearest extremum. In this case, it is necessary that the ratio of TP and SL be at least 1:2, 1:3.
In the considered example, in the end, there was a breakdown of the channel. If the trader had followed a conservative trading method, he would have been able to make a successful deal on the retest of the broken channel. The truth of this breakdown is confirmed by the fact that the retest coincided with the 38.2% correction level from the last upward movement.
The nuances of working on a channel strategy
The main disadvantages of channel strategies include some subjectivity in channel construction and the absence of generally accepted breakdown and rebound criteria. To build a channel, you need only 3 extremes on the chart, but each trader chooses different extremes. In addition, the channels adjust quite often, which also affects the trading results.
Despite the absence of generally accepted criteria for a rebound or breakdown of the channel, we can recommend paying attention to the price behavior near the channel border:
- if the channel was broken in one breath, 1-2 candles, then there is a high probability that it is true. But it is still recommended to wait for the channel retest;
- if, after the rebound from the channel border, the price does not go in the right direction, then it is recommended to at least rearrange the deal to breakeven;
- it is recommended to make deals in the direction of the trend on the higher timeframe.
The Forex channel strategy is also of interest because it does not lose its efficiency over time, as happens, for example, with indicator strategies. All that is required for profitable trading is strict adherence to the rules and competent selection of auxiliary instruments. Source:
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Today I decided to tell you about channel strategies. According to the theory, if you correctly determine the price channel, then you can make good money with it. Names this idea underlies all channel strategies.
Price channels are self-sufficient, so it is quite realistic to trade only on their basis. But most often, additional algorithms are used that confirm the correct entry into the market. These can be Fibonacci levels, divergences or candlestick analysis.
Channel strategies suggest only 2 scenarios for the development of events: the price will touch an important level and reverse or break it. Different strategies imply different rebound and breakout criteria, so they have different rules for entering the market. The type of price channel that is used in the trading strategy also plays a big role.
Varieties of price channels
Any trader can use any of the following types of price channels to trade:
- Equidistant.
- Fibonacci channels.
- Linear regression.
- Corridors with standard deviations.
- Moving averages that form a price channel that moves along the Y axis.
Most often, equidistant channels are used in strategies. These corridors are easily built on the price chart and are very effective at the same time. An equidistant channel is built using three extremes: 2 highs and 1 low, or 2 lows and 1 high. First, a straight line is drawn through the first 2 points, then a parallel line is drawn through the third point. Strategies based on equidistant channels show good results.
The second type of price channels are Fibonacci channels. Here the first straight line is drawn according to the same principle as in the first case, after which at a distance of 0.618; 1.0; 1.618 and 2.618 additional parallel lines are built. In addition, it is also possible to construct additional lines at a certain distance from the channel boundary.
The next type is linear regression channels. To build such a corridor, it is enough to mark a certain zone on the chart, and the channel itself will be built automatically. The distance from the central straight line to the corridor boundaries is equal to the maximum distance from the central straight line to the closing price.
Standard deviation channels are similar to linear regression channels. But here the distance between the middle line and the channel borders is equal to the standard deviation of the closing price from it. Depending on the location of the price in relation to the average straight line, one can judge the mood in the market.
The essence of channel strategies
Almost all channel strategies involve following certain rules of breakout and rebound from the channel borders. Most often, it is at this stage that most mistakes are made. Often, novice traders mistakenly take a small puncture of the channel border for a breakdown, and a small touch for a rebound. In this case, the trader, of course, does not earn anything with the help of channel strategies.
The appearance of a rebound can only be judged if the current candle closes. The reliability of the received signal increases significantly if strong reversal patterns appear on the chart during the rebound.
As for the breakout, there are several trading methods. Orders can be opened immediately after the channel boundaries are broken. This way is more aggressive. A more conservative way is to enter the market after a price correction after a clear breakout.
An example of using a channel strategy
I propose to consider the situation as an example. We build a price channel on a four-hour time frame, on shorter time intervals we can build a few more additional channels, which can also be used to enter the market. Additionally, you can also use the MACD indicator, on which we will identify divergences.
All channel strategies start with building a price channel and tracking price behavior relative to the channel. It is also possible to build several additional channels on shorter time intervals. Next, we need to monitor the price movement in relation to the price channel. It should also be taken into account that signals received from longer time intervals are more reliable.
If the candle touched the border and closed inside it, then most likely it was a rebound. It is recommended to open an order in the presence of confirming signals, or when a divergence appears or when a candlestick pattern appears. Orders are created with stops set near the nearest extremums. Trades are created with take profits, which should be 2 or 3 times more than stops.
In our example, there was a breakdown of the channel. If we had opened an order on time, we would have been able to make good money.
Nuances of channel strategies
Channel strategies, like any other strategies, are endowed with their drawbacks. The main disadvantage is that there are no generally accepted rules for breakdown and rebound, as well as the subjectivity of building a channel. To build a channel, you need to find 3 extremes, and each trader chooses his own extremes. It is also worth noting that price channels often need to be redrawn during the price movement, which also affects the effectiveness of trading.
Currently, there are no generally accepted criteria for rebound/breakdown of a channel. At the same time, professional traders recommend to carefully monitor how exactly the price level behaves near the channel boundaries:
Channel strategies are popular among traders because over time they do not lose their effectiveness and relevance. This feature significantly distinguishes channel strategies from trading methods based on the use of various indicators.
In order to earn income using channel strategies, it is enough to strictly follow the rules and correctly choose auxiliary tools.
Primarily, what is a trading channel?
A trading channel is a price model in which the movement of quotes of a currency pair occurs in a certain trading range for a certain period of time.
That is, on the one hand, the boundaries of the channel are represented by the resistance level, on the other hand, by the support level. Depending on the direction of the trend, a descending, sideways and ascending channel is distinguished.
Now, about building trading channels:
Upward trading channel. To build it, it is enough for a trader to draw a trend line through the two lowest prices and parallel to the trend line - a line at the highest price point. In this case, the maximum price point must be between the two minimum points.
Downward trading channel. The trend line is drawn along two maximum price points - candles, bars and a line parallel to it, which passes through the lowest point. In this case, the price minimum point must be between the two minimum points.
A distinction is also made between confirmed and unacknowledged channels. A confirmed channel is one in which the upper and lower boundaries (support and resistance) have two price touches each. If the support or resistance line is based on one point, such a channel is considered unconfirmed.
Channel trading is a widely used and quite attractive strategy for many traders and is regularly used in practical trading. The strategy is highly profitable with a fairly low level of risk.
For practical trading in the channel, the trading channel should be divided into three zones - the line in the middle of the trading channel, and also, as shown in the figure, at a distance of approximately 10% from the support and resistance lines of the channel.
It is necessary to trade not inside the channel, but strictly from its borders (sales and purchases levels) towards the opposite border. To use this strategy, it is desirable that the width of the trading channel be at least 30 points, and preferably 30-50 points.
Channel trading. A position is entered when the price reaches the buy or sell level (zones). Entry can be made by both a market order and a pending order. A protective Stop-loss order is placed outside the channel, at the level of 10-20 points or according to your approach to risk management or a percentage of the deposit amount. Profit fixation is carried out upon reaching the level (zone) of the opposite border. You can also close part of a profitable position in the middle of the channel, and the second half of the position - upon reaching the opposite border.
The main mistakes when trading in a channel:
The entry into a trading position takes place inside the channel - "after" the price. It is necessary to trade strictly, from the boundaries of the channel and wait for the price to reach these levels
Placement of a protective Stop-loss order at a close distance, which leads to closing the position when the price slightly goes beyond the support and resistance lines of the channel
Transferring Stop-loss to the breakeven level is too early. It is recommended to wait until the first counter fractal closes, as the channel borders are often retested. When closing the opposite fractal in the zone of decrease, the Stop-loss order should be moved along the fractal, and not according to the breakeven level
Closing a trading position prematurely. Discipline should be observed, or a partial exit from the position should be used
Closing a position manually. It is better to close the position with a close stop order and only if the price approaches the border. Otherwise, we will be knocked out of very profitable trades in the event of a true breakdown of the channel.
Also, when trading in the channel, you can additionally use indicators (stochastics), which give signals for a reversal and a correction. In the case when the stochastic generates a reversal signal (Kane's hook), and the price at this time is far from the sell or buy zones, such a signal should be ignored. If the signal appears at the moment the price reaches the channel border (in the 10% zone), then such a signal should be considered true. Professional traders often use at such moments adding to open positions, but it is better not to use this technique for novice traders.
Trading strategy for the breakdown of the channel borders. It is also a commonly used trading strategy.
Trading on the breakdown of the boundaries of the trading channel consists in opening positions to sell when the price breaks through the support zone or to buy when the price breaks through the resistance zone. The strategy works effectively in trending markets and it is not recommended to trade it in a flat market.
Opening a position occurs after breaking through the channel levels at predetermined levels, which are at a distance of your choice from the channel line. The Stop-loss order is located inside the channel, more often in the middle of it, if this does not contradict your risk management strategy, or inside before the border of the broken channel.
After the price breaks through the boundaries of the trading channel, several scenarios for further price movement are possible:
Sharp strong unidirectional price movement on large trading volumes
Price movement with repeated testing of the border of the broken channel (return to the border) and its continuation in the direction of the channel breakout according to the following scheme: breakout - rollback - continuation of movement (see figure)
False penetration of the channel borders, when the price, breaking through the support or resistance line, after a short period of time, returns back to the channel.
For novice traders, the best option is to enter a trading position after retesting the broken channel boundary. This is a more reliable signal, and even considering that you can miss a strong movement, you don’t need to get upset, since opening trading positions following the movement often ends in a false breakout and, accordingly, losses.
It is also necessary for a novice trader to remember that a buy signal will not be considered reliable if the price breaks through the upper limit of the ascending channel and vice versa. When using a trading strategy to break through the channel, you must be guided by the following important rule: reliable signals are signals that occur when the lower boundary (zone) of the ascending channel is broken, and the upper boundary (zone) of the descending channel. Breakouts in the upward and downward channels in the direction of their direction are also possible and often occur, but in such a situation, these signals should be confirmed by other technical indicators. For example, a breakout of the channel boundaries on a large trading volume.
The closest reference point for profit taking or partial closing of a position is a level that is located at a distance equal to the width of the broken channel, pending from its border. If the price, after breaking through the boundaries, returns to the channel, then such a breakout should be considered false and the trader needs to close the position. Also, it is very important that traders evaluate the breakout only when the prices of the candle or bar close outside the channel and do not react by opening a position emotionally only on the basis of a fast price movement.
The main advantage of this strategy is:
- the possibility of obtaining a sufficiently large and quick profit, since when the price exits the channel, the movement is often very strong
- the relative reliability of a trading signal about the intended direction of movement with the ability to enter a trade with low risk.
Quotes of financial instruments move along certain trajectories, regularly forming maximum and minimum points. At these points, the vector of price movement changes direction. If you connect in series the highs with the highs, and the lows with the lows, you will get a zone within which the price moves. Such a zone is called a channel and is used in various channel strategies, some of which are described in this article.
What is a price channel
A price channel is a range within which the price stays most of the time. This range is limited by lines, which can be straight (usually passing through the extremes of one group) or curved (all kinds of indicators are used to build them).
Classification of price channels is carried out according to the relative location of the beginning and end of their boundaries (Fig. 1):
- if the beginning and end are practically at the same level, then such a channel is flat (Fig. 1B);
- if the beginning is lower than the end, then such a channel is ascending (Fig. 1A);
- if the beginning is lower than the end, then such a channel is descending (Fig. 1B).
If the price came close to the channel boundaries 3 or more times, but did not break through them, then it is considered confirmed. Otherwise, the channel is of the unacknowledged type.
Peculiarities of price behavior in the channel
Since the price dynamics within the channel changes periodically, the price often forms reversal patterns that are well known to traders (some of them are shown in Fig. 2). If such a pattern appears when the price approaches one of the channel boundaries, this indicates a high probability of its reversal and movement to the opposite boundary. This principle can be used in the Forex channel strategy "on the rebound".
Also, reversal candlestick patterns can be used in the “breakout” strategy of the channel. But for this, such patterns should be looked for on the older timeframe relative to the working timeframe. For example, if the price channel is ascending on the working chart, and a candlestick pattern has formed on the chart with a higher timeframe, indicating the end of the uptrend, then it is logical to assume that the lower border of the channel will be broken soon. If such a breakout occurred, then after the breakout candle is closed, a short position is opened (StopLoss and TakeProfit are set based on the analysis of the current market situation, for example, support/resistance levels and nearest local extreme points)
The divergence on the MACD indicator can also serve as a confirmation of the price breakdown of the lower border of the ascending channel or the upper border of the descending channel. You should also look for these divergences on the older timeframe in relation to the working timeframe.
Best Channel Strategies
The use of various channel marking methods allows you to create trading strategies for various application conditions. Most of them involve the use of more than one tool for analyzing price dynamics. Three such strategies will be discussed below.
The simplest trend channel strategy
It is based on the linear regression channel - a graphical tool built into MT (located in the "Insert" menu, "Channels" item). Only a pronounced trend is suitable for trading, on which a linear regression channel is built (Fig. 3). Positions are opened inside the channel - if the trend is down, then short, and if it is up, then long. When opening a long position, the price should be near the upper border of the channel, and when opening a long position, it should be near the lower border of the channel.
Identification of the beginning and end of the trend is made on the older timeframe in relation to the working timeframe.
Medium-term channel strategy
For it, you need to install 2 indicators on the price chart (Fig. 4):
- Envelops () - forms a dynamic channel;
- ParabolicSAR - indicates the direction for opening positions.
To open a long position, you must:
- price breaking through the upper border of the Envelops channel;
- Finding the ParabolicSAR point under the price.
StopLoss is set at the level of the nearest minimum.
To open a short position, you must:
- price breaking through the lower border of Envelops;
- Finding the ParabolicSAR point above the price.
StopLoss is set at the level of the nearest maximum.
It is advisable to pre-mark support and resistance on the price chart. If, when conditions arise for opening a short (long) position, there will be support (resistance) at a distance of less than 2 Stop Losses under (above) the opening level, then such a signal should be ignored.
SHI_FX_Strategy()
Refers to scalping TS and is designed for trading on the M15 timeframe. Based on the readings of 4 indicators (Fig. 5):
- SHI_Channel – forms a regressive channel on the price chart according to the Borishpolts method;
- iTrend - a modified RSI capable of recognizing trend reversals;
- Laguerre is an oscillator focused on identifying price impulses that accompany a trend change;
- Perky_Asctrend - An oscillator based switcher.
All trades are opened exclusively in the direction of the channel formed by the SHI_Channel indicator. Long positions are opened when:
- if the price is below the middle of the SHI_Channel;
- finding the Laguerre curve above the level of 0.15;
- crossing the green curve with the red iTrend curve from bottom to top.
Short positions are opened when:
- if the price is above the middle of the SHI_Channel;
- finding the Laguerre curve under the level of 0.75;
- crossing the red curve the green iTrend curve from bottom to top.
StopLoss is located:
- for a long position – below the lower boundary of the SHI_Channel;
- for a short position – above the upper boundary of the SHI_Channel.
TakeProfit is set:
- for a long position – below the upper boundary of the SHI_Channel;
- for a short position – above the lower boundary of the SHI_Channel.
The position is immediately closed when a complex of signals for the opposite deal is formed.
Video
Based on the conditions for placing StopLoss and TakeProfit, you should only trade if the SHI_Channel width is sufficient for the ratio of the TakeProfit size to the StopLoss size of at least 2:1.
"Parabolic in the channel" is a channel trading strategy, whose characteristic feature is the use of two dimensional channels, thanks to which the trader can see the global range and direction of the trend.
Which, in turn, makes it possible to receive accurate signals for opening positions after the completion of the deviation from the main trend (correction).
Consequently, the parabolic in the channel strategy is great for scalping, and its signals are almost always aimed at the continuation of the trend, and not at its reversal...
The price, moving in different directions, almost always has a certain global direction or, in other words, moves at a certain angle, which is usually interpreted as .
However, despite the fact that the strength of the trend can be different, as well as the angle of inclination itself, as the price moves, you can notice a stable range, a corridor in which these fluctuations occur directly.
It is the price deviation peaks within this range that are the most profitable entry points, since the trader enters the market at the most favorable price for himself.
The Parabolic in the Channel strategy, as the name implies, is actually built in a trend channel and exploits this pattern. Moreover, thanks to a special the entry point is visible at a glance.
Strategy conditions
- Markets: FOREX, (can be used on turbo);
- Assets: any, except ;
- Trading time: any, but it is better to choose an active one (the price is more mobile);
- Working interval: any timeframe, optimally M1-M15 according to tests;
- Expiration: will depend on the chart interval and market conditions;
- Brokers: a list of reliable companies is located.
You can download strategy files by clicking on the button:
And install in the MT4 terminal, as shown in
Strategy indicators
The channel trading strategy "Parabolic in the channel" consists of three indicators, which are in perfect harmony with each other and do not need to be adjusted, except in cases where you need to radically rebuild the strategy for older TFs or frankly exotic:
- iFx Strategy indicator: draws a wide trend channel on the chart, which is built based on the lows and highs of the global trend segment. Thanks to it, firstly, you can see the general direction of the price, since the angle of the channel indicates the direction of the trend, and secondly, the points of maximum price deviation. And the presence of a candle near the border is regarded as overbought or oversold.
- iFX Trend: the second channel indicator, working on the principle of the standard Envelopes indicator, as in . Shows us a narrow speculative price movement range. Going beyond the borders, as well as being at them, strengthens the data of iFx Strategy.
- Parabolic-sar-signals: another interpretation of the standard . However, the interpretation is quite interesting - it combines a trend indicator and an oscillator. The main signal indicator of the strategy, which draws an arrow on the main chart, a histogram in a separate window and makes a sound notification.
Signals of the channel trading strategy "Parabolic in the channel"
"Parabolic in the channel" is aimed at finding an entry point with the goal that the rollback against the trend that has appeared has ended and the current trend will continue. Therefore, as you understand, signals should be expected near the channel boundaries.
Buy signal
- The trend is up if the iFx Strategy channel is up;
- The price is near the lower border of the iFx Strategy channel;
- The price is at the lower border of iFx Trend or has completely broken through it;
- Parabolic-sar-signals shows a green up arrow;
- The histogram bar is green.
To select the option expiration time, first of all, take into account the activity of the market, its . If the volatility is high enough, 1-3 candles will be enough for expiration (it will depend on the TF). If the market is not so active, you should increase.
Sell signal
- The iFx Strategy channel is directed down, which indicates the presence of a downtrend;
- The candle is near the upper border of the iFx Strategy channel;
- The price is at the upper border of iFx Trend or has completely broken through it;
- Parabolic-sar-signals shows a red down arrow;
- The histogram is red.
The presence of two channels in a strategy can create some illusion of its complexity, because the number of lines that you will observe on the chart can be a little confusing for beginners.
But if, even a little, signals of the channel trading strategy on history, understand the rules and practice for, then the result will not be long in coming!