The Profitable Ups and Downs of Forex Price Channels: How to Trade
The term ‘price channel’ refers to a special graphical tool used by Forex traders to make buying and selling decisions. On the one hand, it is quite a complex tool, because the data it provides is influenced by a huge variety of factors. However, what makes price channels so useful is that they condense these variables into a simple visual representation.
The price movements of a currency pair are plotted within two parallel lines. These lines represent the various up and down forces which affect price. The top line signifies resistance (downward pressure). When the price approaches it, most Forex traders try to sell before the support line is hit and value is lost.
Conversely, the bottom line signifies support (upward pressure) and it works in the opposite way. If you are learning to trade with price channel, you should know that approaching the support indicates a good time to buy. Similarly, the idea is that traders try to buy at the right time before the resistance line is hit and the value stops climbing.
So, it is all about that space between the two parallel lines. The size of the space (or channel) is determined by the amount of price activity. If there is a lot of fast paced change within the market, the channel will be larger. If prices are moving slowly and there is no reason to expect rapid fluctuations, the channel is narrow. Price channels can point upwards, downwards, or remain horizontal.
After a time, the direction of every channel changes. In some instances, this triggers a neutral period in which price activity remains fairly consistent. However, it may also change direction as the result of a channel breakout and this occurs more abruptly. Breakouts are defined by a sharp upward or downward trend which moves beyond the top or bottom line and closes strongly afterwards.
When this happens, price activity is no longer limited by the original channel. For example, if the price drops below the bottom line (and ‘breaks out’), it indicates that the bearish forces are powerful enough to disrupt the previously bullish tendency. After which, the bullish channel is replaced by a new bearish one. Skilled traders can use channel breakouts to predict and prepare for trend reversals.
Trade with Price Channel in Five Simple Steps
Step One: Pick Your Trading Conditions
It doesn’t matter what direction your currency pair is trading in, because you can use a price channel to plot both downward and upward trends. It will also represent neutral movements (no significant price changes). This tool is compatible with all timeframes and can be used in conjunction with five, ten, and thirty minute charts as well as day charts too.
Step Two: Open Your Forex Trading Account
Open up your online Forex account or the Forex tracking software that you prefer to use. Launch a chart for the chosen currency pair (the euro and the yuan, for example) and select the desired time conditions. Navigate to the technical indicator list and hit the PRICE CHANNEL button. This will enable you to set the support and resistance lines.
Step Three: Create the Price Channel
Plot where you want the bottom line (support) to start and end. The system should automatically fill in the gap and establish the connection. Repeat the process for the top (resistance) line. The resulting price channel should now be contained within two parallel lines and contain most of the price activity.
Step Four: Analyse the Price Channel
The next step is to study the channel to determine whether it is a good time to buy or sell. Channels which point upwards are indicative of ‘rising’ or ‘bull’ tendencies. They are characterised by greater low and high points. Conversely, channels which points downwards signify a ‘falling’ or ‘bear’ trend. They are defined by smaller lows and highs. Horizontal channels are neutral and represent completion of a bull or bear phase.
Step Five: Identify Your Next Move
If the currency prices are contained within an upwards pointing channel (ascending), buy the currency pair just before the price hits the bottom (support) line. However, if the prices are contained within a downwards channel, it is a good time to sell the currency pair just before the price hits the top (resistance) line. If the price is range bound, wait until it hits either line to make a decision.
Making Price Channels Work for You
When learning to trade with price channel, don’t get tempted into trading against the trend, particularly if you don’t have much Forex experience. While it is possible to make a big profit, it involves a lot of risk and is generally only used by high level professionals.
You should take care when analysing the activity within channels. They can be more complex than they first appear, because there are often internal variations within the main channel. To make the safest trading decisions, you need to consider all of the available information.
This includes data from external sources like newspapers and expert forecasts. Forex trading is a dynamic and fast paced world. Trends can develop and disappear within weeks, so careful and consistent monitoring is essential. Use price channels as a supplementary tool.
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.
Subjective: Based on or influenced by personal feelings, tastes, or opinions. Proceeding from or taking place in a person’s mind rather than the external world. Subjective traders are intertwined emotionally with their trades. Their signals are generally entering out of greed and exiting based on their own fear. They believe in their opinions more than the actual price action. They base entries and exits on whether they are feeling good or bad about a trade. A subjective trade comes out of the imagination of the trader, from their own beliefs, opinions, and what “should” happen in their view. Many times reality is not even cross checked as a reference, and the subjective traders can end up seeing what they want to see instead of what is really going on. Their compass is their emotions, opinions, and ego and they can have internal goals other than making money. They value being right and predicting the future over everything else. They love making a good call or being right and making money may not even be the main goal in their trading. Objective: A person or their judgment is not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality. Objective traders have a quantified method, a system, a plan, rules, and principles they trade by. They know where they will get an entry signal based on facts, and where they will get out based on price action. Objective traders have a written trading plan to guide them. The guides of the objective trader is historical price action, chart patterns, probabilities, risk management, and their edge. They react to what is happening in reality in quantifiable terms that can be measured. They go with the flow of price action not the flow of internal emotions. Summary: Be objective in your trading, do not let the subjectivity of your emotions and ego interfere with the reality of price action. Don’t be attached to your trade emotionally and don’t attach your ego to it. Be the trader that witnesses the trade from an emotional distance with curiosity. If you can find that space within that is between you and your trading results your trading will become very different and probably more profitable. There should be valid reasons for entering a trade based on signals that can be shown to have an edge and money management that gives the opportunity for big wins and small losses. When you can approach the results of your trades with equanimity whether they are wins or losses then my friend you are at the next level.
Traders go in search for a winning trading system not understanding that after they find one that making a few crucial mistakes can turn a profitable system into an unprofitable one. Once you have a system that seems robust from historical price data, chart studies, or back testing be careful not to make some of these crucial mistakes: Not honoring your original stop losses. Big losses make winning systems losing ones. Profitable trading systems keep losses small. Don’t get frustrated and quit trading it during drawdowns. All systems have losing streaks, the key is to manage risk and stick to your plan until the system has time to work out with profits as the market becomes conducive to your system’s method. Some systems need price ranges and others need up trends, most trading systems break down in volatile markets are down trends. A lack of discipline, drifting from taking defined entries and exit signals to your own opinions and emotions is hazardous. Trading too big can create big losses and even account blow ups, no system can survive huge position sizing that makes the first string of losses the last. Style drift is deadly, slowly changing your trading system during active trading is not a good plan. Research has to happen after hours when the market is closed and backtested before changes are made. If you can’t mentally and emotionally deal with the equity curve of your trading style then you can’t trade it long term. You can’t quit during losing streaks or get too excited during winning streaks. You have to believe that your method will work over the long term, confidence comes from research, backtesting, and homework. Don’t trade someone else’s system, build your own. Custom to fit who you are by using the principles that you believe in and work. Trading too big during losing streaks ruins the potential of winning, don’t try to get back the money the market took from you instead try to stop the momentum of your losses by trading smaller and smaller until a new winning streak emerges. Straying from your trading plan and making one big, bold, can’t miss trade and blow up all your previous profits. Don’t let greed make you do something stupid, stick to the plan. In the long term discipline, consistency, and hard work leads to profits not predictions, opinions, and big bets