Currency Pairs: Any
Forex Indicators: none required.
In order to trade the forex trading strategy, you need to know what a diagonal price channel and how it looks like so when the channel pattern is forming, you’d be ready to take advantage of some really good trading setups that happen when price touches the channel lines.
WHAT IS A PRICE CHANNEL PATTERN?
A price channel pattern in simple terms is when the price is running between (in a channel) support and resistance levels. When price is in a channel, it tends to stay in that channel until a channel breakout happens.
Now, there’s two main kinds of price channels:
- the horizontal channel &
- the diagonal price channel.
This forex trading strategy is based on the diagonal channel pattern.
Here’s what a price in a downward channel looks like: You can click to enlarge if you cant see the charts clearly.
So how does an upward channel looks like? Well, it would be the exact opposite of the chart above. Here’s an example of an upward channel:
HOW TO DRAW A DIAGONAL PRICE CHANNEL
Drawing a diagonal price Channel is very easy…here’s how (keep referring to the charts above):
First you need to identify the points where you want to start drawing your channels from. These are numbered 1 & 2 on the charts above.
- You need a minimum of 2 points to do this.
- Next, you connect these points with a trendline.
- That’s it.
HOW DO YOU TRADE A DIAGONAL PRICE CHANNEL?
This is also very easy. Here are the steps:
- Once you’ve drawn your channel, based on the 2 points on both sides of the channel you wait for price to come to either one of these channel lines.
- Once price touches the channel lines you open a trade based on what side of the channel line the price touches: if it touches the channel line above, you SELL. If price touches the channel line below, you buy. See the charts above for more clarity.
WHAT TYPES OF ORDERS WOULD YOU USE?
- You can use instant market orders-which means as soon as price touches one of the lines, you open a buy or a sell order immediately.
- Or you can use a SELL STOP or BUY stop Orders.
WHERE TO PLACE STOP LOSS AND HOW MUCH STOP LOSS IS REQUIRED?
- Placing stop loss is easy: Just Place your stops outside of the diagonal channel lines.
- By how many pips? Well, your stop loss should be determined by the timeframe you are trading in. If you are trading on 5 minute charts, place your stop loss 10-15pips outside of the channel line. If you are trading in 1hr or 4 hr charts, you stop loss should be 20-50pips outside of the channel line.
- If you place you stop loss too close to the channel lines, any false price spike would take you out and then guess what happens? The price goes in the direction you placed your trade originally-but now you are out of the game already-so you don’t make any money.
HOW TO SET TAKE PROFIT TARGETS
Here are a couple of options to set take profit targets. Use whatever options that you like.
- Set your profit target based on the length of the channel in pips.
- Or you can set your take profit target halfway point in the channel.
- Or you can take half of your profits off the table when price goes to halfway in the channel.
- Or set your take profits to 3 times the amount your risked: for example, if you stop loss is 20 pips then set your take profit target to 60 pips.
HOW TO MANAGE A TRADE THAT IS IN PROFIT (TRADE MANAGEMENT)
Here are a couple of options to manage a trade that is in profit:
- when price moves by the amount your risked, move your stop loss to breakeven. But sometimes, if you stop loss is so small, there will be a danger that you will get stopped out quite frequently as well.
- when the price moves halfway up or down the channel, move stop loss breakeven. You may consider taking half the profits off the trade and leave the other half running.
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