Expert: Valeria Bednarik, Trader College LLC and True Market LLC
Topics that will be covered for above session are:
- Concept, definition
- Practical trade with channels
- Strategies
Who is Valeria Bednarik?
Valeria has been an active Forex trader for the last 2 years, specializing in the International Foreign Exchange Market. She also graduates in the Universidad Catolica del Salvador, in Argentina, as a Public Account, specializing in financials and cost managements. She actually manages an important clients portfolio for IFX Markets, Boston and is trader at Trader College LLC.
Speech Material:
Concept, definition
A channel is a figure of high reliability, formed by two parallel trend lines at it borders. One connects the price highs, the other the price lows, and in between, there is a zone where price use to stay till broke. Both trend lines, upper and lower act as support and resistance.
There are different kind of channels, but mostly work the same way. Let’s see the a practical example of each one:
Horizontal Channel:
It can be find either in up or down trends. It doesn’t mean a change of the previous trend, only a rest in the dominant trend, but usually the break is produced in the same way, previous trend was moving.
Bullish channel:
For itself, shows us the major trend. It doesn’t mean a change of that trend, until is broke down.
Bearish channel:
As the bullish one, shows us trend.
Referring to bullish and bearish channels, you can see we marked some points, with numbers 1, 2, 3, 4, 5, etc. There are not a fixed numbed of times price touch channels lines, but is important to know, that we need at least points 1 2 3 and 4, (meaning two maximum and two minimums) to CONFIRM the formation.
For all cases, target is calculated measuring the distance between both trend lines, and projecting that value the way the broke is produced; that could be a minimum target price, where currencies will try to go.
Always remember, both lines must be parallel; different angles will lead as to misleading conclusions.
Practical trade with channels
Channels are useful to trade, because they show us certain points where reactions should start. When drawn properly, it can assist us to identify areas of support or resistance (determinate by the floor and the roof of the channel). Is a very valuable tool, because once
a channel is defined we can see many triggers inside it
But first of all, trading with channels gives us a great strategy, because for itself we have a stop loss defined (maximum loss to afford), and a reliable price target to set the take profit. Practically, once the price touch the bottom, or floor of the channel, there are good chances that, once confirmed the reversion, will try to reach the top or roof of that channel. In case we choose to wait for a confirmation (what I recommend) we can draw a trend sub line, or minor trend line, and once this line is broken, we have a signal that price will try to reach the opposite band of the channel
For this strategy, we have to always remind that if price runs off any extreme of the channel, the strategy loose its efficiency and if we trade properly, then we are out of the market wither by the stop or the limit order.
Let’s a practical example
Case GBPUSD
In the following chart, we can see a bullish channel in GBP/USD, in a 1 hour time frame, starting on June 19 9.00 am est. You can see the channel formed by the two blue lines; also, there are the green spots, two at the top, three at the bottom, that define the channel. In between there are nearly 70 pips, and ended June 20.
If you take a look at the same channel, in smaller charts, like 30 or 15 minutes, you can see how currency respects both trend lines. In this chart we can find different zones and options to trade using the channel as reference.
First, just looking the chart, once the channel is confirmed by the second green point at the top (remember, a channel to be so, needs at least to touch two points in the floor, and two in the roof), we have our first bearish trade.
In the next chart, wit the same draw as above, but in a 30 minutes time frame, and based on Technical Analysis, we draw a secondary trend line color RED. According to what we see, as the price is near the roof of the channel, we suppose that price will respect that, rebound and try to reach the bottom
And here is why the red trend line is useful for: we use it as a confirmation of the rebound. Once is broken (broke means in this case a new candle open under the minor trend line) should try to reach the bottom of the channel. We have to set the stop loss a little above the top line of the channel, and our take profit, near the bottom line.
In order not to loose our winnings, we recommend to use a trailing stop, so as to reduce our risk and ensurance our profits.
You can also see , at the end of this last chart, how price couldn’t reach the top of the channel: they also help telling us when the trend is losing strength or accelerating. The failure to reach a channel line provides warning that the current trend is losing strength like this case). On the other hand, if a currency breaks out of the channel line, the same way channel is showing us, then it should be interpreted as a sign that the current trend is accelerating.
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