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Forex Channel Trading Indicator
Price charts often look like a chaotic mess. A code that takes forever to decipher. And this is often true, especially for new traders with untrained eyes. However, for traders who have had enough chart time, forex charts at times reveal an orderly pattern amidst the chaos.
Take this chart for example.
To them, the chart has become an orderly and predictable market, which increases their confidence in trading their setups, and increasing their chances of having a profitable trade.
Trading channels is not as complicated as it sounds. It all starts with identifying major supports and resistances. However, instead of horizontal supports and resistances, what commonly takes place are diagonal supports and resistances. To qualify as a support or resistance, price must respect the identified support or resistance twice, and confirmed by a third swing high or swing low.
The resulting support and resistance should be parallel to each other to be considered as a channel, with the resistance as the upper bounds of the channel and the support as the lower bounds of the channel.
Once the channel is identified, it would be easy to notice how price bounces up and down the price chart traveling from the support to the resistance, then back to the support, repeatedly. This becomes an orderly chart, which is somehow easier to predict.
How to Effectively Trade Channels
Within the channel, price would have minor diagonal supports and resistances, often forming minor patterns or even minor channels, which become more visible on the lower timeframes.
Patterns are well and good, they could serve as an additional confluence or rationale for taking the trade. However, their use ends there, an additional confidence booster for the trading setup. What is important is the support or resistance where the trade should breakout from.
To identify which direction the trade should take, we should first identify if the channel is bullish or bearish. In this case, the chart is a bullish trending channel. Since, this is a bullish trending channel, what we will be looking for are bounces off the channel’s support, and breakouts from the minor resistances. We could therefore, forego the other markings on the chart and consider only the channel, and the minor resistances for the trade setup.
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