In today’s lesson, we will see the dynamic channel in forex trading and how we can make a profitable forex trading strategy using this trading tool.
The dynamic price channel forms with the standard trendlines with other parallel trendlines.
When prices move within the channel, it works at a significant level. Furthermore, traders find it interesting when the price breaks out from the channel with massive power.
How to Identify Dynamic Price Channel
We all know that the forex market moves like a zigzag formation. Therefore, within a strong uptrend, there is a minor bearish correction. On the other hand, within a downtrend, there is a minor bullish correction.
Another basic rule you should know to understand the dynamic channel trading is that the uptrends create new higher highs, and the downtrend creates new lower lows.
When we draw straight lines from lows to highs or highs to lows, we find trendlines, as we can see in the image below:
Trendlines work as a dynamic support and resistance levels from where price shows a significant movement.
However, there are parallel trendlines in the dynamic price channel where it works as both support and resistance levels.
In most of the trading platforms’ price channel indicator is free and easily accessible. In the following section, we will see a price channel strategy using the channel trading technique.
Dynamic Price Channel Trading Strategy
Dynamic price channels may work as both support and resistance levels from where a significant market reaction is expected.
Furthermore, traders can add price action in this trading strategy to understand the big picture to produce a better trading result.
Let’s see how we can make profits from the dynamic channel forex trading method.
Channel Trading With Price Action
In this trading strategy, we will use a price channel to identify the market direction and use the price action to enter the trade at the right time.
In the above image, we can see a bullish price channel where the price is moving up by creating new higher highs and getting support from the dynamic trend channels.
The first step of the dynamic price channel trading strategy is to identify the location of the price. Move to the daily or weekly timeframes and find the key support and resistance levels.
If the price moves down from the key resistance level, we will focus on sell trades only. Similarly, if the price moved up from a key support level, we will focus on buy trades only.
Institutional traders who focus on long timeframes only drive the forex market. Therefore, daily or weekly timeframes provide better price direction that helps to understand the market context.
Entry: In a bullish market condition, find a price channel that moves upside by creating new higher highs.
Despite the bullish movement, wait for some minor correction towards the downside and enter the trade as soon as it rejects the channel support. Make sure to enter the trade after closing the reversal candle only.
In the image above, we can see how to enter the trade from the bullish dynamic price channel.
Similarly, for the bearish trade, find the market that moved from a key resistance level and enter the trade from the channel resistance after the candle closes. In the image below, we can see how to enter the trade from the bearish dynamic price channel.
Stop loss: Setting a stop loss is easy for this trading strategy. For bearish trade setup, put your stop loss above the reversal candle with 10-15 pips buffer. On the other hand, for bullish trade, put the stop loss below the reversal candle with some buffer.
Take Profit: If you take the trade from the channel support, you can close the trade when it creates a new higher high and reaches near the trendline resistance.
Make sure to close the trade 10-15 pips earlier before hitting the trendline resistance. The same theory applies to the bearish market, where you should close the trade before reaching the trendline support.
However, when the price breaks the trendline with massive speed, it shows that the price will move far from the price channel.
Channel Breakout Trading With Price Action
The forex channel trading system also shows trading opportunities when the price breaks out from the channel.
Wait for the price to break out from the channel with massive speed. As it is a counter-trend trading, the speed of breakout is important to avoid the risk of a potential false breakout. A strong breakout indicates that the price breaks the level with high volumes that may sustain.
Entry: For the bullish channel breakout strategy, wait for the price to come at the channel resistance with a corrective speed. Enter the trade as soon as the price rejects the channel resistance with a reversal candlestick formation.
Similarly, for the bearish trade setup, enter the trade after the price rejects the channel support with a proper candlestick formation.
Stop Loss: Like channel trading, put your stop loss above the reversal candle with 10-15 pips buffer for a bearish trade. However, for bullish trade, put the stop loss below the reversal candle with some buffer.
Take Profit: wait for the price to come near any static support and resistance levels. Close the trade if the price shows some weakness at these levels. However, if the movement is strong, you can extend the take profit for the next level.
In the price channel strategy, trade management is a crucial part. As we know that the forex market is full of uncertainties, so, you should manage your trades properly. It would help if you move the stop loss at breakeven as soon as the price makes new higher highs or lower lows.
On the other hand, the Risk: reward ratio is another essential element to manage risks. It would help if you take trades that have a minimum of 1:2 risk: reward ratio. Therefore, if any trade was stopped out, there will be more room to recover the trade in the future.
Furthermore, to avoid the unexpected market move, do not take more than 2-3% risk per trade. Even if you follow your trading strategy accordingly, there is a risk of being stopped out. Therefore, risk management will help your trading account to grow for further trading.