Channel Trading System
The forex channel trading system is one swing trading system where its quite easy to implement and you can get really good profits quite easily.
But before you can do that, you must be able to draw proper channels.
WHAT IS CHANNEL TRADING?
Channel trading in simple terms is when the price is running between (in a channel) support and resistance levels. When price is in a channel, it tends to stay in that channel until a channel breakout happens.
Here’s what a price in a downward channel looks like: You can click to enlarge if you cant see the charts clearly.
So how does an upward channel looks like? Well, it would be the exact opposite of the chart above. Here’s an example of an upward channel:
HOW DO YOU DRAW A CHANNEL?
Drawing A Channel Is very easy…here’s how (keep referring to the charts above):
First you need to identify the points where you want to start drawing your channels from. These are numbered 1 & 2 on the charts above.
- You need a minimum of 2 points to do this.
- Next, you connect these points with a trendline.
- That’s it.
HOW DO YOU TRADE A CHANNEL?
This is also very easy. Here are the steps:
- Once you’ve drawn your channel, based on the 2 points on both sides of the channel you wait for price to come to either one of these channel lines.
- Once price touches the channel lines you open a trade based on what side of the channel line the price touches: if it touches the channel line above, you SELL. If price touches the channel line below, you buy. See the charts above for more clarity.
WHAT TYPES OF ORDERS WOULD YOU USE IN TRADING A CHANNEL?
- You can use instant market orders-which means as soon as price touches one of the lines, you open a buy or a sell order immediately.
- Or you can use a SELL STOP or BUY stop Orders.
WHERE DO YOU PLACE YOUR STOP LOSS AND HOW MUCH STOP LOSS IS REQUIRED?
- Placing stop loss is easy: Just Place your stops outside of the channel lines.
- By how many pips? Well, your stop loss should be determined by the timeframe you are trading in. If you are trading on 5 minute charts, place your stop loss 10-15pips outside of the channel line. If you are trading in 1hr or 4 hr charts, you stop loss should be 20-50pips outside of the channel line.
- If you place you stop loss too close to the channel lines, any false price spike would take you out and then guess what happens? The price goes in the direction you placed your trade originally-but now you are out of the game already-so you don’t make any money.
HOW DO YOU SET YOU TAKE PROFIT TARGETS?
Here are a couple of options to set take profit targets. Use whatever options that you like.
- Set your profit target based on the length of the channel in pips.
- Or you can set your take profit target halfway point in the channel.
- Or you can take half of your profits off the table when price goes to halfway in the channel.
- Or set your take profits to 3 times the amount your risked: for example, if you stop loss is 20 pips then set your take profit target to 60pips.
HOW DO YOU MANAGE A TRADE IN PROFIT?
Here are a couple of options to manage a trade that is in profit:
- when price moves by the amount your risked, move your stop loss to breakeven. But sometimes, if you stop loss is so small, there will be a danger that you will get stopped out quite frequently as well.
- when the price moves halfway up or down the channel, move stop loss breakeven. You may consider taking half the profits off the trade and leave the other half running.
If someone was ready to start trading and had a basic understanding of the markets and asked me for some of my best advice on how they could make money as a trader, this is what I would tell them. 1.Understand that trading is like any other professional endeavor, you will be monetarily rewarded based on the effort and work you put into it to learn how to trade. Trading is one of the few fields where amateurs can go compete with professionals with a very low price of entry. Your trading tuition will have to be paid through the experience of losses and time doing your homework. You will get out of trading the effort you put into it. 2.If you have to get others opinions about your trade, asking others advice on entries and exits, then you really need to stop trading and work on a detailed trading plan that gives you a road map of how manage a trade. If you don’t have a trading plan every thing you do is random. There is no edge in randomness. 3.Do not waste your time on searching for the Holy Grail of trading, an easy money, can’t lose, trading method does not exist because markets change in cycles. Trading is always a competitive event between traders and market conditions are always changing from volatile to stable and from trending to choppy, so nothing works in all market environments. 4.Successful trading is based on your winning trades collectively being bigger than your losing trades are collectively. So your goal is to either trade a system with a few huge wins and a lot of very small losses or a high winning percentage system that keeps the losing trades controlled. 5.Do not look for a good trade, instead look for a great winning methodology to trade with. Have the right trading process and the money will follow eventually. Looking for easy money in the markets is the process for losing money. 6.Your risk management while trading will determine your trading success more than your method. You have to make it safe to be wrong a few times in a row and not lose all your trading capital. 7.If you want to be a successful trader then focus on what is actually happening with price action and stay away from your own opinions and biases of what should happen. Wanting to be right for the sake of your ego is another expensive game. You can’t predict a nonexistent future. 8.You can’t use anyone else’s system, you have to trade a system that fits you. One that you understand and can trade with discipline because of your confidence in it and yourself. 9.Look for and find your own edge. What are you the best at doing in the markets? Some are masters of shorting, others trend following, some are great at selling options that expire worthless. Usually the type of trading you are the most passionate about gives you the drive to research it until you find that edge. 10.Master some aspect of trading, find something to be an expert on. A market, a stock, IPOs, options, futures, day trading, trend following, etc. Don’t be a jack of all trades, be a master of one type of trading.
First of all I would like to recommend a great document out there - "DB Guide to Exchange-Rate Determination" which was written by Deutsche Bank in 2002 and is overfilled with FX rate determination, forecasting methods which can be used for all short term, mid-term and long term trading. If you haven't read it, look for it, download to your Kindle and take the time. It is worth reviewing. :) In the documents several FX trading strategies are described with reference to many academical papers and literature. One of them - the Forward-Rate Bias strategy. Its results are stunning for longer term FX trading and its sharp ratio has beaten the S&P500 twice. As the DB says: "This is the bedrock of Deustche Banks's Forward-Rate Bias trading system". Forward Premium and Discount It is necessary to understand what Forward Premium and Discount is before diving deeper in to this. Premium - Situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, but any expected future exchange rate suffices. Discount - situation where the domestic current spot exchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period. where N - represents the maturity of a given forward exchange rate quote d - represents the number of days to delivery P - is the premium (if positive) or discount (if negative) F - is the forward exchange rate S - is the current spot exchange rate Forward Bias Strategy - Trading the Bias "Favorite approach to trading the forward-rate bias is to adopt a diversified strategy to exploit the fact that currencies trading at a forward discount tend to outperform those currencies trading at a forward premium". The recommendation is "going long the three highest-yielding currencies in the industrial world and going short the three lowest-yielding currencies in the industrial world. Net long/short positions are put on at the beginning of each month and then closed at the end of each month. This process is repeated each month over time". Long Run Track Record for USD-Based Investors This is truly old backtest and I would be really interested whether it can perform this good in todays market. So if there was a demand for it, I would dive into that ;o) Write a comment if you want to see it.
Hi,Over the last week or so I have been playing round with a system that I think originated from a member called 'James The Giant' over at Forex TSD. It was called 'Making a living using CCI'. Or something to that effect. I've tinkered around with it and created my own template. The results have been very good so far. If interested I will post the template when I get home from work.