Channel Trading is one of the most common practices in forex strategies. A trading channel is two parallel lines drawn at a resistance and support level that gives traders a sense of security to buy at support and sell at resistance.
It is one of the simplest methods used in technical analysis and traders often rely on this to identify optimal levels to buy or sell. Bigger trading opportunities may present themselves when there is a channel breakout, and the probability of a quick significant move increases dramatically. A valid channel must have a minimum of three touches or more and it must be aligned as shown in the image below:
An Overview of Forex Market
A few decades ago, the forex market was mainly dominated by big banks and institutional firms. Initially, these foundations were trading in the market on behalf of the clients and companies. This has been changing with the rise of the internet and now it turned into retail services where investors, companies, and small banks can participate in the forex market. There are also a large number of forex brokers which provide brokerage services for FX currency pairs and CFDs. A forex broker is mainly the intermediate between the online trader and the FX market.
Basically, the forex market doesn’t have trading centers in the sense of organization or venues. Instead, this market is mainly a virtual connection conducted through terminals and via the world wide web. Since then, technology is advancing and trading is becoming faster and more reliable. Currently, the execution time can be below 0.04sec.
Investors and regular traders are able to access the market when they open forex accounts. Accordingly, the traders can start funding their accounts and select the right strategy for them to trade. In the fundamentals of trading, traders and newcomers prefer the forex market due to the large benefits. The foreign exchange market for instance is enormous with an average daily turnover ranging around $6.6 Trillion US Dollars. The forex market managed to gain positive traction because of its liquidity as it allows traders to grab more trading opportunities.
Traders go through due diligence in interpreting and analyzing price movements in executing trading decisions. Among others, the two popular types of analysis are technical and fundamental. Technical analysis is a study of the price movement through a historical perspective wherein traders look at previous price patterns to determine future actions. Fundamental analysis approaches trades in perspective to economic, social, and political forces that may influence currency prices and trigger potential trading opportunities.
Usually, the FX market is sometimes not a clear term for many since it is involved in different types of financial services including banks, money transfers services, and online trading. The main definition of FX markets is the main market where currencies are traded. Due to the nature of the interconnected world and the evolution of communications this market is a nonstop market across the globe. Mainly, understanding how the forex market works is an essential part of learning the fundamentals of trading.
Types of Channel Trading
Ascending channel is the price action between upward sloping parallel lines that characterize higher highs and higher lows and it is referred to as an uptrend. It is constructed by drawing a lower trend line that connects the swing lows and an upper line that connects the swing highs.
The descending channel is a chart pattern formed from two downward trendlines drawn above and below a price that represents resistance and support levels. It is defined by a trendline supporting the lower lows and a line connecting the lower highs. It is also referred to as a downtrend.
A horizontal channel is composed of two horizontal trendlines that join variable pivot highs and lows to show the price within the upper line of resistance and the lower line of support. It is also known as a price range or sideways trend. Traders watch out for a breakout or retain trading within the identified range.
Channel trading maintains traders in the right direction by keeping them aware of the potential areas of support and resistance in advance. The key to maximizing profit is through implementing a proper risk to reward ratio that always gives huge returns by properly utilizing this method.
Guide to Forex Trading Strategies
As you explore the different approaches, you will need to learn technical and fundamental analysis as well as mastering the MT4 platform. Copying a strategy without understanding the market movements and the ability to conduct trend analysis is risky.
Fundamentally, you will need to define your investment portfolio and find out your risk/reward ratios (R/R). Each forex investment should come with a solid plan and a good demonstration of trading basics. Avoid copying a forex strategy that doesn’t match your trading goals or strategies that you don’t fully understand and able to know what is the drawbacks of it. There is no perfect strategy in trading that can guarantee profit and in most cases, forex strategies can differ based on the market movements and news.
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