The use of channel trading strategies in forex markets allows a trader to have a better vision of the market behavior compared to that one he could have by using simple trading exploiting only single trendlines. Long and short positions are taken at the upper and lower limits of the channels, something which depends on the slope of the channel. Alternatively, positions can be initiated when the channel is broken and successfully retested for support or resistance. When using this strategy, the best thing a trader can do is trading break outs from channels, rather than within.
Which is the most profitable way to trade break outs? Here are some of the most frequently used criteria. The first thing to do is plotting the channel, by connecting high/low/high or low/high/low sequences. After that, a currency pair breaking out of the channel and retesting it must be observed. When these two events occur, a trader can set stop signals at the low of the channel and entries at the break out level.
Channel break out trading is one of the most used channel strategies by forex traders. If a trader wants to follow it must start observing the channel connecting swing highs and lows. When a break out fails to the upside, the pair falls into the channel and break out to the downside. The break out level shows previous support/resistance levels, thus making it a potential area to short on retest. The pair retests the break out and falls to the support. The stops are placed at an in-the-middle swing high level, prior to the break out one.