The Horizontal Price Channel Forex Trading Strategy is a trading strategy that is entire based on a price structure created called a channel and it is used by all levels of traders-including beginner forex traders.
Currency Pair: Any
Indicators: None Required
Additional Requirement: knowledge of reversal candlestick patterns and the ability to identify them when they form on your forex charts.
WHAT IS A CHANNEL PATTERN?
Well, a horizontal Price Channel pattern looks like this:
The horizontal channel is an area of congestion between an upper resistance level and lower support level.(Refer to chart above).
HERE’S HOW THE HORIZONTAL CHANNEL PATTERN FORMS
- When market has been trending for some time, at some point in time, it will start moving sideways. And if this sideways movement is bound by an upper resistance level and a lower support level,then we have this thing called a horizontal price channel forming.
- So in a horizontal price channel there must be a clear or visible resistance level and support level.
- How do you know that a horizontal price channel is forming? After “bottom2″ that’s when we know we are in a horizontal channel pattern. That means, top1 and top 2 as well as bottom 1 and bottom2 have already been formed and now price hits bottom2 and starts to head back up, that’s when you should know that there is potential channel pattern forming(Refer to chart below)
THE TRADING RULES OF THE HORIZONTAL PRICE CHANNEL FOREX TRADING STRATEGY
For buying and selling rules, refer to this chart above:
After bottom2 is formed and price starts to climb up, you wait until the resistance level is reached (at top3 location)
- Your entry will be at top3-use a sell stop order. Enter your order only on confirmation with a bearish reversal candlestick pattern. Make sure the this candlestick closes before you place your order. For more info on what type of bearish candlestick you should be looking for, click here.
- Place your stop loss 5-10 pips outside of the resistance level (or line) or place you stop loss anywhere from 3-5 pips or more just above the bearish reversal candlestick pattern which you use to enter a short trade.
- Your take profit target level should be on the price where the support level is sitting.
- After “top3″ forms and price moves down to the support level which would be around “bottom3″ wait for a bullish reversal candlestick pattern and place your buy stop order 3-5 pips above its high after it closes.
- Place your stop loss order 5-10pips outside of the support level or you can place it anywhere from 3-5 pips or more just below the low of the bullish reversal candlestick pattern which you use to enter a long trade.
- Your take profit target level should be the price level at which the resistance line is.
ADVANTAGES OF THE HORIZONTAL CHANNEL PATTERN FOREX TRADING STRATEGY
- Its not difficult to spot the channel pattern if you know what to look for.
- horizontal channel patterns that happen in larger timeframes like 4hrs and daily have a huge range of movement between the channel so if you enter a trade at a right time, you will make good money trading this channel.
- the risk (or stop loss) is very small and the great thing about this is you are using support and resistance levels to base your stop loss on which is the best way to place a stop loss.
DISADVANTAGE OF THE HORIZONTAL CHANNEL PATTERN FOREX TRADING STRATEGY
- If you are trading on a much smaller timeframe, you need to be vigilant and regularly monitor your trade(s) as it may bounce on the other side (either support or resistance level) and wipe out your profit when you should have taken them or at least lock in some profits before that happens.
- horizontal channels don’t last forever-a breakout may happen soon. In case of breakout happening (either to the downside or the upside), you need to switch to a breakout trading system to capture those breakout moves.
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