A Channel is formed when we draw a trendline and then a line parallel to the trendline with most of the price action if not all falling between the two lines. By scanning through a few charts, you will find that it is easy to identify channels. Channels occur frequently.
However, currencies rarely stay in a narrow range for long and have a tendency to breakout from a tight range and develop a strong trend in the market. Important economic news releases can act as a trigger for a breakout.
A common scenario can be a channel formed just prior to the release of an important US economic data. The chances of a breakout under such a scenario would be high. So, this simple channel breakout trading strategy entails looking for a narrow channel formed prior to some fundamental market event like the release of an important economic data. It can also be used to identify a channel formed just prior to the open of a major financial center like the London Open.
For this channel breakout trading strategy to work, you should first identify the channel on an intraday chart like 5 minutes, 15 minutes, 30 minutes charts etc prior to the announcement of a major fundamental news in the market. Price action should be contained within a narrow range.
Enter long when the price action breaks above the upper channel line with a stop loss placed just below the upper channel line. Use a trailing stop as the price moves in your favor.
Similarly, enter short when the price action breaks below the lower channel line with a stop loss placed just above the lower channel line. Use a trailing stop as the price moves in your favor.
Another variation to this Channel Breakout Trading Strategy is to use an entry order to go long 10 pips above the upper channel line and an entry order to go short 10 pips below the lower channel line and wait for a breakout to take place in either up or down direction.
If the breakout takes place in the upper direction, the entry order to go long will be triggered. Immediately place a stop loss 10 pips below the upper channel line and take profit at double the channel range or use a trailing stop if it becomes an extensive upper move.
Similarly, if the breakout takes place in the down direction, entry order to go short will be triggered. Immediately place a stop loss 10 pips above the lower channel line and take profit at double the channel range or use trailing stop in case it develops into a major down move.
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