In the financial market, there are many forex trading strategies you can use. There are traders who specialize in using algorithms while others specialize in buying oversold assets. One strategy that has proven the test of time is price action. This strategy involves analysing at a chart to identify patterns, then acting on them. For example, you might identify a sharp upward trend and decide to follow it instead of waiting for a reversal. This article will focus on the price channel strategy that falls within the price action strategy.
What is a channel?
In forex, a channel refers to a movement of a financial asset within two parallel lines. The movement can be in an upward, downward, or horizontal trend. In all these, the upper line is known as the resistance while the lower line is known as the support line. The goal of a trader is to place a buy trade when the price hits the support line and exit when it hits the resistance line.
How to draw a channel
The first thing you need to do is to look for trends on the chart. This will help you to see how the asset is trading. After this, you need to draw two lines. In a chart that is moving upward, the line should touch two or more swing high levels. The other line should touch two or more swing low levels. The same should be done in a chart that is moving downwards or horizontally. An example of a channel pattern is shown in the chart below.
This is the most basic type of a channel strategy. Another type is drawn using tools, for example Fibonacci Retracement. This is a tool that was developed using a number of mathematical calculations. This channel is drawn by applying the tool on the most extreme levels of the currency pair as shown below. The goal of this channel is to help you identify key levels which the currency pair will go to.
In this example, as you can see, the price of the pair is along the 50% Fibonacci Retracement level. Therefore, it is likely that the pair will move to the 61.8% or the 38.2% levels. Therefore, you can place a trade and put the two levels as the stop loss or take profit levels.
Another tool that can help you identify channels is the Andrew’s Pitchfork. This channel is drawn by applying the tool to the asset’s lowest point, the highest point, and then the current price. The end result is that it will plot a number of lines as shown below. Again, the goal of a trader is to use these channels as the potential areas for initiating a trade and for placing the stop loss and take profit.
Another tool that can help you identify the channels is the Bollinger Band. This is an indicator that gives three lines. The middle line is usually the period’s moving average and the other two are the standard deviations of the pair. When the price is along the middle band of the Bollinger Band, it is an indication that the pair’s price will move in either direction. When it is on the lower band in a trend, it is an indication that the downward trend will continue. Similarly, when it is along the upper band, it is an indication that the trend will continue. In a horizontal trend, when it is along the lower band, it is an indication that the pair will likely move to the middle level. An example of this is shown below.
This article was a brief introduction to using channel strategy and charts. With enough experience and practice, even if you’re a beginner, you can use channel strategy to help you become a better forex trader.