Forex channels strategy is one way in technical analysis that is useful as a point of entry for traders.
Channels forex strategy is one of the tools in conducting technical analysis which is an exploration of the trendline.
How to draw it is also quite simple, if you already make a trend line, then you only need to make one more trend line, at the top or in the valley opposite from the first trend line.
The steps, the first time we draw a trend line in accordance with the direction of the trend.
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Types of channels in technical analysis
In technical analysis, channels forex strategy are divided into three categories, as follows.
- Up Channel (Ascending Channel), which is a channel that is formed when price movements are in an uptrend.
- Down Channel (Descending Channel), which is a channel that is formed when price movements are in a downtrend.
- Sideways Channel (Horizontal Channel), the channel that is formed when price movements are sideways (ranging).
Up Channel (ascending channels)
This Channels forex strategy shows the movement of price with an uptrend tendency.
How to draw it is also quite simple, you just duplicate the trendline first trend lines.
In the first step, we first draw a trend line in accordance with the direction of the trend, in this case, uptrend.
In the picture below, for example, you draw a trendline at the market of an uptrend.
The second step is to draw a line parallel to the trendline.
This second line is projected so that it connects the top points.
As with the trendline, this line must at least connect two peaks.
Now we get Up Channel or also often referred to as Ascending Channel, as shown below.
Down Channel (descending channels)
Meanwhile, to draw a Down in channels forex strategy or often referred to as Descending Channel, as simple as drawing a bullish channel.
The first step, draw a trendline that connects at least two peaks in a bearish trend.
Then make a line parallel to the trend line connecting at least two valleys.
The image below shows an illustration of the descending channels.
Sideways Channel (horizontal channels)
How to draw horizontal channels is also the same as how to draw channels on up channels and down channels.
In a market that moves in a range or commonly referred to as a sideway market, we can draw a horizontal channel.
The first step is to create a trend line by connecting peaks to peaks and then making a trend line by connecting valleys to valleys.
We call these channels sideways channels or ranging channels or horizontal channels
The image below is an illustration on sideways channels
The channel line function
Using channels may seem simple, but these channels are very useful and can be used to estimate the buy or sell area.
Both channel lines function as support and resistance. The line above functions as a resistance, while the line below serves as support.
For easier mention, we just call these two lines as support lines and resistance lines.
When the price is in the support line area, then you can try to look for confirmation in the form of a bullish signal to buy, with a target in the resistance line.
Beware of the price breaks below the support line. If that happens, it’s good to consider closing the position. Of course, this will also have to look at the market situation.
Similarly, when prices are in the resistance line area.
At that time you can try to look for confirmation of a bearish signal to sell with the target in the support line.
Of course, you have to be alert if the resistance line breaks after you sell.
Important think in draw channels
- Similar to drawing a trend line, to draw channels also should not be forced to fit with the market.
- The two trend lines must be parallel with each other.
- There are no standard provisions to draw a channel, but the steeper the channel angle you make, the more unreliable or less valid, because the pattern of price movements that rise or fall sharply will be prone to break or breakout on the channel you make.
- The more often the channel retested or fails to break the price movement, the more valid and reliable it will be.
- Support and resistance lines on a channel do not indicate a certain level of Resistance or Support, but rather an area (range) of resistance or support.
How to Draw Channels on MetaTrader 4
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Facilities for drawing channels are usually available on the trading platform provided by the broker, including the Metatrader platform.
On the Metatrader platform, to display channels on a chart is to click on the insert menu >> channels >> linear regression.
There are several choices in the channels submenu, but for drawing parallel channels, usually using linear regression.
To attach a channel to the price chart, you simply click on the Linear Regression option, then click on the high and low levels that can be found on the chart, according to the following conditions:
- Up Channel: If the price moves uptrend, ie when prices form low levels higher than the previous low (higher lows), and high levels higher than the previous high (higher highs), to draw channels is to connect the minimum two low levels or valley, then make parallel lines (with the same angle) and adjust their position so that they touch at least one high level.
- Down Channel: If the price moves downtrend or forms high levels lower than the previous high (lower highs), and low levels that are lower than the previous low (lower lows), to draw channels by connecting at least two high levels, then make parallel lines and adjust the position so touch at least one low level.
- To create a Horizontal Channel, simply draw lines connecting at least two low levels and two high levels on sideways or flat market conditions.
The image below is an example of how to draw channels
Example of Trading with a Channel forex strategy
Forex Trading using channel strategy to determine short positions is in the Resistance area which is obtained at the top of the trend line.
Meanwhile for open Buy, in the Support area where channels are the bottom trend line.
And to anticipate by placing a tight stop loss level if the price breaks the channel.
The level of taking profit is usually in areas near Support or Resistance.
The picture above is an example of trading using channels in USD/CAD pairs.
Sometimes when prices are in the support channel area, you might still hesitate because there might be channel breaks, to confirm you can use other tools, either with price action and candlestick patterns or with RSI. etc.
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The Donchian channel was discovered by a professional trader named Richard Donchian who is one of the experts in technical analysis.
The Donchian channel will use two lines in the chart, where one line is the highest point of a certain period, and another line is the lowest point.
Traders must choose the type of time frame that will be used, although by default the number of periods to be used in the Donchian channel is 20 days.
Although the Donchian channel is quite popular among traders, this indicator is not a default indicator on the trading platform.
If you want to use the Donchian channel on the trading platform, the trader must first download it as a custom indicator.
Donchian channels formula
The appearance of the Donchian Channel indicator is similar to that of Bollinger Bands.
However, the calculation is simpler. If the BB reference is the standard deviation, then the Donchian Channel uses extreme price levels.
This indicator consists of 3 curve lines, each of the 20 periods Simple Moving Average (SMA), the highest price in 20 periods, and the lowest price of 20 periods.
Because the Daily time frame of 20 days is trading time in 4 weeks, the rules of use within 20 days are also called 4-week rules.
How to trade with Donchian channels
The rules of a trading breakout with Donchian channels are breakout entries at the highest or lowest level.
Entry is carried out on the next bar on condition that the closing bar price is now above or below the highest or lowest level
Entry buys and exit sell if prices have passed the highest level for 20 days (20-day high), or entry sell and exit buy if prices have passed the lowest level of 20 days (20-day low).
This tool very relevant to be applied to the forex market, especially for medium and long term trading using Daily time frames.
The picture above is an example using Donchian channels
- Point A: entry buys and closes sell orders that are still open if any.
- At point B: sell and close buy orders that are still open, if any.
- Point D: entry buy and close sell orders that are still open if any.
- At a point, C does not have to sell because the next bar opening price is above the 20-day low, even though the closing price is now below the 20-day low.
Which is the Best Channel Trading System?
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If you are still a beginner the simplest way is to use the trend line, you only need to understand the concept of trends and look for peaks and valleys to connect the trend line, and you enter by waiting for prices to bounce on the trend line.
But if you are a cautious trader, using linear regression channels is a good tool for you, you only need parallel channels whether uptrend downtrend or ranging market.
But if you like to use complicated tools, then Donchian channels are an attractive option, this indicator is developed by professional traders, and requires deep experience and understanding.
Channels’ forex strategy is a way of trading that is included in technical analysis.
To get strong channels, the more often the price of a retest channel line, the more valid the channels are.
In drawing channels, it must not force to fit the market, the two trend lines must be parallel without any sharp slope.
Linear regression is a channel that is often used to draw channels in the presence of three lines, top and bottom, this will produce parallel lines.
Donchian channels are another type of channels that are dynamic, they are not found on the platform MetaTrader, but must be downloaded as a custom indicator.