The Channel Trend strategy – Indicators & Technical Analysis

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Indicators: Price_Channel_Trend

How to use Donchian Channels (adapted from dailyfx article)

  • First find the trend to determine the trend
  • Learn to enter Forex breakouts using Donchian Channels.
  • Channels can be used to trail your stop and lock in profit.

The Forex market is known for its strong trends, which can make trading breakouts of support and resistance levels an effective approach to the markets. To plan for such market conditions, today we will review a three step breakout strategy using the Donchian Channels.

The first step to trend trading is to find the trend! There are many ways to identify the trends depicted below, but one of easiest is through the use of the 200 period MVA (Moving Average). To begin add this indicator to your chart, and then see if price is above or below the average. This is how we will determine the trend and our trading bias.

Given the information above, traders should look for opportunities to buy the EURJPY in its current uptrend as price is above the average. As well, the AUDNZD pictured below offers selling opportunities since the pair is priced under the 200 period MVA. Once we have this information, then we can plan entry placements for a potential breakout.

Trading Donchian Channels

Donchian Channels are a technical tool that can be applied to any chart. They are used to pinpoint current levels of support and resistance by identifying the high and low price on a graph, over the selected number of periods. For today’s strategy we will be using 20 periods meaning that the channels will be used to identify the 20 day high and low in price.

Since the price of the EURJPY is trading above the 200 MVA, traders will want to identify new entries to buy the pair on a breakout towards higher highs. With our current 20 Day high identified by the Donchian Channels at 145.68 traders can set an entry to buy the EURJPY one pip above this value.

The process of initiating sell positions in a downtrend is exactly the opposite. Again, we will revisit the AUD/NZD Daily graph pictured below. As price is below the 200 MVA, traders will look to sell the pair in the event of price creating a new 20 Day low. Currently that low resides at .8775 and traders can look to initiate new sell positions under that value.

Setting Risk & Trailing Stops

When trading any strategy, setting stops and managing risk should be considered. When using Donchian Channels, this process can be simplified. Remember how our pricing channels (representing the 20 Day high or low), act as an area of support or resistance? In an uptrend, price is expected to move to higher highs and stay above this value. If price moves through the bottom channel, representing a new 20 Day low, traders will want to exit any long positions. Conversely in a downtrend, traders will want to place stops orders at the current 20 period high. This way, traders will exit any short positions upon the creation of a new high.

Traders may also use the Donchian Channels as a mechanism to trail their stop. As the trend continues, traders may move their stop along with the designated channel. Trailing a stop in this manner will allow you to update the stop with the position, and lock in profit as the trend continues.

Trend trading strategy TMA Bands with Stochastic

Trend trading strategy TMA Bands with Stochastic is a classic combination of an oscillator and a trend indicator with the ability to trade binary options.

Trend trading strategy TMA Bands with Stochastic Is a profitable combination of trendy channel indicators Triangular Moving Average and oscillator stochastic in its arrow interpretation without redrawing.

The TMA Bands with Stochastic strategy is suitable not only for trend trading, but also for trading binary options.

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Input parameters

  • Currency pairs: any
  • Timeframe: M5 and older (for binary options, the expiration time is 5-7 candles, depending on the timeframe)
  • Bidding Time: Any
  • Risk management: after calculating the stop loss, choose this lot volume (option), so that the risk is no more than 2-5% of the deposit per transaction

Indicators Used

  • TMA CG Mladen (half length 50, price 6, deviation 1,61)
  • TMA 55 (half length 10, price 0, deviation 2,4)
  • Stochastic Buy Sell arrows (5,3,3)

Price Chart Setup

  • Unpack the archive
  • Copy the template to the templates folder
  • Copy indicators to the MQL4 folder -> indicators
  • Restart the terminal
  • Open the chart of the desired currency pair
  • Install the template named TMA Bands with Stochastic

The graph should look like this:

TMA Bands with Stochastic Trading Strategy Template

Signals indicating the opening of a long position (purchase of the Call option)

  • the candle closed under the lower border of the TMA in white;
  • the lower border of the white TMA is under the blue TMA;
  • a green up arrow appeared.

Examples of entering a long position

Signals indicating the opening of a short position (purchase of the Put option)

  • the candle closed above the upper border of the TMA in white;
  • the upper boundary of the TMA in white is above the TMA in red;
  • a pink down arrow appeared.

Examples of entering a short position

Setting a stop loss and take profit order

  • stop loss set above / below the previous local maximum / minimum;
  • the position closes when the price reaches the midline or the opposite boundary of the TMA CG Mladen channel.

Trend trading strategy TMA Bands with Stochastic – This is an advanced version of the classic link “trend indicator + oscillator”, which, due to the use of copyright indicators, has more profitable trading signals.

242# Reversal Pattern Strategy

123 Reversal-Trend Trading

HFT high frequency trading with SR

Submit by Dimitry

Reversal Pattern Strategy is a trading system based on the support and resistance lines draws by the 123 pattern indicator, this feature is very important because I can trades or trend following in the direction of the main trend or reversal.

The function of all the other indicators is to help make the best choice of trading in both trend and reversal.

This template is for trading with binary options or for scalping and day trading.

Time Frame 1 min, 5min, or 15 min.

Currency pairs: majors and minors.

Expiry time 1 min 5 candles, 5 min or 15 min 3 candles.

Metatrader 4 indicators setting

UFX Trend (draws the channel trend ).

123 patterns (the main indicator).

Daily open line.

M5 cash M15 (fast ema 1 period, slow ema 50 periods, RSI 7 periods).

1a green dot timing trend indicator.

Heiken Ashi default setting.

Example of trading rule for reversal trading

Wait that forms the support dot line of 123 patterns.

Heiken Ashi green bar,

M5 cash M15 buy arrow.

RSI 3TF crosses upward.

Initial stop loss on the previous swing low.

Wait that forms the resistance dot line of 123 patterns.

Heiken Ashi red bar,

M5 cash M15 sell arrow.

RSI 3TF crosses downwward.

Initial stop loss on the previous swing high.

In the pictures Reversal Pattern Strategy in action.

4 Effective Ways to Trade a Channel

By Galen Woods in Trading Articles on December 25, 2020

Price channels are helpful indicators for maintaining focus. Unlike many other trading indicators, they plot directly over price action. Instead of distracting you from the price action, channels offer a useful framework for analyzing market movement.

There are many flavors of price channels out there. But their recipe boils down to two ingredients:

  • A representative line cutting through price action
  • A measure of volatility to expand the line into a channel

There are dozens of trading channels including:

Regardless of your favorite channel tool, there are four ways to trade them.

In this tutorial, let’s explore the four different approaches to make the most out of this versatile tool.

These four approaches align with the basic types of trading setups.

Channels are perfect for pullback (continuation) trades. These are setups that you look for in a trending market.

Ideally, look for a channel that is sloping at a healthy angle (not too steep or too flat). This characteristic confirms that the market in a sustainable trend.

In the examples below, we will use the classic trend line channel. With practice, you can use this simple price action tool to:

  • Confirm the market trend
  • Identify pullbacks and entries
  • Time your exits

Trading Example

Let’s go through this channel trading example.

  1. With these two swing highs, you could draw a downward sloping trend line.
  2. Then, to complete the price channel, anchor a parallel line to this swing low. (This is the channel line.)
  3. The market rose to test the trend line, which served as a resistance. On top of that, the test also ended at a resistance zone offered by a previous consolidation area. Hence, the context was excellent for a bearish trade. The bearish inside bar presented a nice short setup.
  4. Here, the channel line provided the perfect price target for this continuation trade.

We could have identified this short setup with only the trend line. However, the channel added value by offering a clear exit point for this trade.

To learn more about trading trends with trend line channels, check out these resources:

#2: Trading Reversals with Channels

The width of a trend line channel sets expectations for volatility. Hence, if a trending market accelerates beyond the channel, you can interpret it as a sign of exhaustion.

This means that when price exceeds the channel trend line, consider the possibility of a climactic move.

Has the trend has exhausted itself?

If your answer is yes, look for reversal trades like the one below.

Trading Example

The chart below shows the daily prices of the SPY ETF.

  1. This was the most recent trend line channel. Unlike computed volatility bands (e.g., Bollinger and Keltner), we need to adjust trend line channels manually by updating them to track the most recent price pivots.
  2. An entire bar formed below the channel. How did the market respond to this bearish thrust?
  3. The market rejected it with force, forming a bullish outside bar with a long lower shadow.

In theory, it’s challenging to pinpoint reversal trades. Hence, it pays to be more selective and to limit ourselves to only the best setups.

Here are some guidelines for finding the best reversal trades.

  • Ensure that the channel is going against the trend of the higher time-frame. Ideally, you are looking for a retracement of a more significant, more dominant trend.
  • Look for reversals when the trend is within steep channels. Steep channels are unsustainable.
  • Strong rejection of any significant thrust beyond the channel trend line. (Like the outside bar in the example above.)

#3: Trading Ranges with Channels

Channels are not just for trending markets. They are also useful in highlighting range-bound trades.

In horizontal channels, the natural strategy is to trade without strong directional bias. Look to sell short at the top of the channel, and buy at the bottom.

The Gimmee bar trading setup is a classic example of trading sideways markets with channels. However, in the Gimmee bar strategy, instead of a trend line channel, we apply the Bollinger Bands.

  • Bollinger Bands are formed around a moving average, using standard deviation as a volatility measure to envelope price action.

Trading Example

The chart below shows the market entering a meandering phase after a climactic surge.

If you’re not familiar with the Gimmee Bar setup, you might want to take a quick look at the rules in this article before proceeding.

  1. Here, identifying the beginning of a sideways market is the crux. One way to do so is to look for thrusts beyond an expanding Bollinger Band. It marks unsustainable momentum, after which the market is likely to reverse or go sideways.
  2. Look at these short Gimmee Bar entries. A bearish Gimmee bar signal forms when a reversal bar overlaps with the Upper Band. (Observe how the market rejects each attempt to rise above the Band. Compare them with the earlier surge. It’s apparent that market behavior has changed.)
  3. These are the long setups. They were not only overlapping with the Lower Band; they also bounced off the support level formed by the earlier consolidation area.

No trading strategy is perfect. The chart above shows both winning and losing signals. If you manage your risk well, the Bollinger Bands offer sufficient profitable opportunities.

Also, remember that this is a range trading strategy. Hence, keep realistic profit objectives. A good rule of thumb is to exit near the opposite Band.

For more Gimmee Bar trading examples, refer to our review of the Gimmee bar trading setup.

#4: Trading Break-outs with Channels

The earlier strategies assume that the channel will contain price action. Thus, they seek to buy low and sell high within the channel.

What if this assumption fails?

Then, we might have a break-out trading setup. A break-out trade has the potential for quick profits. However, identifying valid break-outs is an art that is hard to master.

Here are some guidelines that traders deploy to find valid break-outs:

  • Waiting for confirmation
  • Pay attention to volume. Valid break-outs move quickly with increased volume.
  • Look out for break-out bars with above-average bar range. (Yum-Yum continuation pattern.)

Break-out Trading Rules

Here, let’s stick to a simple approach using the Bollinger Band.

Bullish Break-out

  1. Wait for a bullish bar to close above the Upper Bollinger Band. (This is the break-out bar.)
  2. Place a buy stop order above the break-out bar.
  3. The bar immediately after the break-out bar must trigger the order. If not, cancel it.

Bearish Break-out

  1. Wait for a bearish bar to close below the Lower Bollinger Band. (This is the break-out bar.)
  2. Place a sell stop order below the break-out bar.
  3. The bar immediately after the break-out bar must trigger the order. If not, cancel it.

Understanding The Rules

  • The first rule looks for a technical break-out signal.
  • The second rule ensures that we enter only if the market momentum is on our side. This step serves as confirmation.
  • The last rule demands immediate follow-through, which is critical for a successful break-out.

Trading Example

This example applies the trading rules above.

It includes untriggered break-out bars and both winning and losing trades.

  1. This bullish break-out bar looked powerful in isolation. But the market did not follow through. Waiting for confirmation helped to avoid fake-outs like this one.
  2. Two consecutive bars closed below the Bollinger Band. However, we should focus only on the first one. Since it was not triggered, we should cancel our order. Look for the next break-out bar only after the market has reverted into the Bollinger Band.
  3. Another dramatic thrust with wide bearish gaps and bars. (Like Point #1) However, again, the break-out bar was not triggered here. These convincing (but failed) break-out attempts trapped more traders into the range.
  4. These two bearish break-out bars were triggered, but the profit potential was limited. (No strategy is perfect.)
  5. Finally, this bullish break-out bar was the real deal. It led us to a new bullish trend.

In the circled area, two bars seemed like bullish break-out bars. But they were not as they closed slightly below the Upper Bollinger Band. Moreover, they were not triggered.

This example uses simple price action confirmation to find break-out setups. There are many other ways to validate break-outs.

If you want to study other approaches, take a look at:

  • Quick Trade using Linear Regression Channel – A classic example of a break-out trade.
  • A Simple Day Trading Strategy – It uses MACD to confirm the break-out of Bollinger Bands.

Make the Most out of Trading Channels

Channels are powerful trading tools that highlight trading opportunities for all four types of basic trade setups.

However, for some traders, having too many trading options is a drawback.

  • They look for trading setups everywhere.
  • They take a retracement trade, and then a reversal trade, and then think that a break-out is imminent.
  • All these within a few minutes.
  • They are overtrading.

A solution is to draw a more significant channel to analyze the big picture. Then, only take trades in its direction.

For indicator-type channels, you can increase both the look-back period setting and the volatility parameter to create a broader channel to contain long-term price action.

Now that you’re familiar with the versatility of price channels, it’s time to go channel surfing.

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