SUBTLETIES OF WORKING ON CHANNEL TRADING STRATEGIES
How to trade using channel trading strategies? We will discuss the subtleties and nuances of this trading style. Let’s talk about how to build a trading channel, what are the pros and cons of channel strategies.
A trading strategy is one of the cornerstones of trading. A trader without a strategy turns into an ordinary person, randomly poking buttons on the terminal. Each of the strategies has its own characteristics, and today we will reveal all the subtleties of channel trading strategies.
THE ESSENCE OF CHANNEL STRATEGIES
The price of a pair in the foreign exchange market fluctuates within a certain corridor, which can be represented as a channel. “Walking” prices in the channel is the main principle on which all channel trading strategies are built.
Trading in the price channel makes a profit if you clearly define the channel in which the price moves. For this, a certain time interval is taken, and it determines the levels to which the price reached, but did not cross them. These levels are the upper and lower boundaries of the corridor. And this is the main problem for many traders – the correct construction of the price channel.
In fact, the usual graphical construction is sufficient for trading, and the usual corridor on the chart is already the simplest trading strategy that does not require additional tools for confirmation. Nevertheless, many traders consider it necessary to use a variety of ways to confirm the signal. It can be candlestick patterns, various indicators of levels, divergence, etc.
In the channel trading system, two scenarios are considered:
- the price has broken through the channel border;
- the price did not break the channel border.
At the same time, each strategy has its own breakdown criteria and its own rules for opening positions. In addition, the type of channel used for trading plays a very important role.
The most common types of channels are:
- Channels constructed on Fibonacci levels;
- equidistant channels;
- channels using standard deviation;
- channels built on the principle of linear regression.
The real list is much larger. For example, a channel can be formed by moving averages, vertically shifted, etc.
ADVANTAGES OF CHANNEL STRATEGIES
The advantages of channel trading strategies include:
- low trading risks;
- simple rules, understanding which will not be a problem for a beginner;
- high profitability.
However, like any other strategy, a channel strategy requires strict adherence to the rules for opening positions and observing money management.
Trading on a channel trading strategy, you must adhere to a number of key points:
- the best timeframes for trading are M30 and older;
- positions open when a rebound from the boundaries into the channel;
- the channel is built in the direction of the trend: upward – at two lows and one maximum, downward – on the contrary;
- a position is opened only after the price reaches the channel border;
- It is allowed to place a pending order outside the channel, in case of a breakthrough.
In many cases, the effectiveness of trading signals in a channel strategy depends on the stability of the channel. If there are signs of a trend change or the end of the channel, then this strategy for trading is better not to apply.
If the price breaks through the channel border and goes beyond it, then, in most cases, the price movement will be approximately equal to the width of the previous corridor. This gives the trader the opportunity to plan and open a deal on time.
The effectiveness of channel strategies is enhanced if oscillators are used to determine price reversals. And also the truth of breaking through the borders of the corridor.
To work on channel strategies, a channel can be built independently using extrema, or you can use the author’s developed channel indicators. We recommend checking each indicator on a demo account before using it in real transactions.