25# Channel Strategy Trading System
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Channel trading is less exotic but nevertheless works very well with currencies.
The primary reason is because currencies rarely spend much time
in tight trading ranges and have the tendency to develop strong trends. By
just going through a few charts, traders can see that channels can easily
be identified and occur frequently.
A common scenario would be channel
trading during the Asian session and a breakout in either the London or the
U.S. session. There are many instances where economic releases are triggers
for a break of the channel. Therefore it is imperative that traders keep
on top of economic releases. If a channel has formed, a big U.S. number is
expected to be released, and the currency pair is at the top of a channel,
the probability of a breakout is high, so traders should be looking to buy
the breakout, not fade it.
Channels are created when we draw a trend line and then draw a line that is parallel to the trend line. Most if not all of the price activity of the currency pair should fall between the two channel lines. We will seek to identify situations where the price is trading within a narrow channel, and then trade in the direction of a breakout from the channel.
This strategy will
be particularly effective when used prior to a fundamental market event
such as the release of major economic news, or when used just prior to the
open of a major financial market.
Here are the rules for long trades using this technique.
1. First, identify a channel on either an intraday or a daily chart. The price
should be contained within a narrow range.
2. Enter long as the price breaks above the upper channel line.
3. Place a stop just under the upper channel line.
4. Trail your stop higher as the price moves in your favor.
Examples
Let us now examine a few examples. The first is a USD/CAD 15-minute chart shown in Figure . The total range of the channel is approximately
30 pips. In accordance with our strategy, we place entry orders 10 pips
above and below the channel at 1.2395 and 1.2349. The order to go long
gets triggered first and almost immediately we place a stop order 10 pips
under the upper channel line at 1.2375. USD/CAD then proceeds to rally
and reaches our target of double the range at 1.2455. A trailing stop also
could have been used, similar to the ones that we talked about in our risk
management section in Chapter 8.
The next example, shown in Figure 9.23, is a 30-minute chart of
EUR/GBP. The total range between the two lines is 15 pips. In accordance
with our strategy, we place entry orders 10 pips above and below the channel
at 0.6796 and 0.6763. The order to go long gets triggered first and almost
immediately we place a stop order 10 pips under the upper channel line at
0.6776. EUR/GBP then proceeds to rally and reaches our target of double
the range at 0.6826.
Figure 9.24 is a 5-minute chart of the EUR/USD. The total range between
the two lines is 13 pips over the course of four hours. The channel
actually also occurs between the European and U.S. open ahead of the U.S.
retail sales report. In accordance with our strategy, we place entry orders
10 pips above and below the channel at 1.2785 and 1.2752. The order to go
short gets triggered first, and almost immediately we place a stop order 10
pips above the lower channel line at 1.2772. The EUR/USD then proceeds to
sell off significantly and hits our target of double the range of 26 pips. More
aggressive traders also could have trailed their stops to take advantage of
what eventually became a much more extensive move lower.
This Strategy Write by kathy Lien “Day Tading and Swing Trading the Currency Market,136-138.)
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