DailyFX.com -

Pricing channels are popular trading patters which can develop on your favorite currency pairs. Channeling markets have characteristics of both ranges and trends, which can create an exciting way to trade since they are easily recognizable on your charts. Today we will discuss exactly what a price channel is and how you can develop a strategy around one.

Let’s get started!

First, before you can trade a price channel, you need to identify on your graph. This process can be done relatively easily using basic technical analysis. Traders should first identify and connect a series of highs and lows on your graph. Below we can see an example of this process on a EURAUD 4Hour chart. Notice how resistance has been formed by connecting the two previous highs to form a ascending line of resistance. Since resistance is rising, this means support should be rising as well as with the creation of a series of higher lows. These lows should run parallel to the resistance line that was previously drawn completing the price channel pattern.

While the EURAUD graph used in today’s example is an ascending price channel, it should be noted that channels may also decline in a downtrend or trade sideways during ranging markets.

Learn Forex – EURCAD 4Hour

Price Channels for Trend Trading

(Created using FXCM’s Marketscope 2.0 charts)

Trading the Channel

Once a price channel has been identified, we can then take a plan of action for trading it. Trading pricing channels is much like trading a range since we will pinpoint areas of support and resistance for entry order placement. In an ascending pricing channel entries can be set on or near a level of existing support. Traders will look to buy the market in an uptrend in the event price bounces from support up to a higher high. It’s important to remember that trading a pricing channel is ultimately a support and resistance strategy. That means that traders will wait for their opportunity to enter the market and not trade when prices reside between these levels.

One of the easiest ways to trade and ascending price channel is to set a buy entry at support. This way when price touches this value, orders to buy the EURAUD would be executed into the market. However, traders seeking further market confirmation can also employ the use of an oscillator such as CCI when trading pricing channels. Traders using an oscillator will wait for their indicator of choice to return from overbought territory to sell as market momentum begins to return lower in a declining channel.

Trading with oscillators may be new for some traders. For more information on CCI be sure to take advantage of DailyFX’s training course through Brainshark. The course is free and after clicking the link below sign into our ‘Guestbook’. You will be met with a series of videos including other strategies involving the CCI Indicator!

Take the CCI Trading Course via Brainshark HERE

Learn Forex – USDCHF Channel Entries

Price Channels for Trend Trading

(Created using FXCM’s Marketscope 2.0 charts)

Exiting Positions

Once an entry is decided, the next step in trading channels is to plan your exit. One reason traders like price channels, is because they provide clear areas for stop and limit order placement. In an upward sloping channel, stops should always be placed below the line of support. If price moves to a lower low and invalidates the channel, traders will want to exit positions to buy the EURAUD as quickly as possible.

Profit targets can also be set by using the pricing channel pictured above. Areas to take profit can be extrapolated by extending our line of price resistance. Traders will want to exit on a test of this line, as price may reverse at this point and continue trading inside of the channel.

Related Articles
  1. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  2. Forex Fundamentals

    These Currencies Are The Biggest Losers Of The Stock Downturn

    Here’s a list of the hardest-hit currencies amid the global stock market mayhem.
  3. Forex Strategies

    Will the Euro Continue to Rally? (EUO)

    The euro is rallying. Should investors chase this performance or is the real opportunity on the other side of the trade?
  4. Investing News

    China’s Forex Reserves Dropped Significantly

    China’s forex​ reserves dropped by a record $93.9 billion at the end of August to $3.56 trillion because the Central Bank has been selling dollars to provide a cushion to the falling yuan​
  5. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  6. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  7. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  8. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  9. Investing

    Financial News Comparison: Bloomberg Vs. Reuters (BAC, GOOG)

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  10. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center