How to Trade FOREX Channels
A channel is one of the most common technical analysis tools used by traders in all markets. It is created by drawing one line connecting price highs and another line connecting price lows. Some traders use channels to trade short-term breakouts, while others prefer to trade off high and low extremes. Whatever strategy is used, together with the great leverage, liquidity, and explosive volatility of the Forex, channels can be a gateway to outstanding profits.
- Understand channels and their variations. Channels are constructed by drawing straight lines at an angle connecting the highs and lows on a particular chart, forming a band between which prices often trade. Other forms of channels are mathematically calculated from price and volatility data, and form an envelope around the price of a particular pair, with the high end denoting an overbought extreme, and the low end denoting an oversold extreme. Such channels are called linear regression lines, Bollinger Bands, and Keltner Channels.
- Settle on a trading timeframe. Most Forex participants trade on an intraday basis, using 5-minute, 15-minute, or 60-miunte charts. Each chart obviously looks different. If you trade channels on a 5-minute chart, the range and depth of price movement is considerably more constricted than if you trade on a 60-minute chart or longer. The timeframe you elect to trade will both affect the primary technical picture you see, as well as how you will need to adjust your profit expectations and stop loss safeguards.
- Trade bounces off of channel highs or lows. Many traders combine this strategy with indicators called "oscillators" as part of a short-tem countertrend strategy. A particular advantage of countertrend strategies is that most of the time Forex prices tend to churn in a relatively narrow range, bouncing off lower and upper channels. This creates many short-term, high probability trades. The disadvantage is that when prices do eventually breakout to the upside or downside, they move very strongly, and getting caught on the opposite side can lead to large losses.
