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Channel Strategy
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Channel trading is less exotic but nevertheless works very well with cur­rencies. The primary reason is because currencies rarely spend much time in tight trading range and have the tendency to develop strong trends. By just going through a few charts, traders can see that channels can easily be identified and occur frequently. A common scenario would be channel trading during the Asian session and a breakout in either the London or the U.S. session. There are many instances where economic releases are triggers for a break of the channel. Therefore it is imperative that traders keep on top of economic releases. If a channel has formed, a big U.S. number is expected to be released, and the currency pair is at the top of a channel, the probability of a breakout is high, so traders should be looking to buy the breakouts not fade it.

Channels are created when we draw a trend line and then draw a line that is parallel to the trend line. Most if not all of the price activity of the currency pair should fall between the two channel lines. We will seek to identify situations when the price is trading within a narrow channel, and then trade in the direction of a breakout from the channel. This strategy will be particularly effective when used prior to a fundamental market event such as the release of major economic news, or when used just prior to the open of a major financial market.

Here are the rules for long trades using this technique.

•  First, identify a channel on either an intraday or a daily chart. The price should be contained within a narrow range.

•  Enter long as the price bleaks above the upper channel line.

•  Place a stop just under the upper channel line.

•  Trail your stop higher as the price moves in your favor.

Examples

Let us now examine a few examples. The first is a USD/CAD 15-minute chart shown in Figure 8.22. The total range of the channel is approxi­mately 30 pips. In accordance with our strategy, we place entry orders 10 pips above and below the channel at 1.2395 and 1.2349. The order to go long gets triggered first and almost immediately we place a stop order 10 pips under the upper channel line at 1.2375. USD/CAD then proceeds to rally and reaches our target of double the range at 1.2455. A trailing stop also could have been used, similar to the ones that we talked about in our risk management section in Chapter 7.

Figure 8.22 USD/CAD Channel Example

( Source: eSignal. www.eSignal.com)

The next example, shown in Figure 8.23 is a 30-minute chart of EUR/GBP. The total range between the two lines is 15 pips. In accor­dance with our strategy, we place entry orders 10 pips above and below the channel at 0.6796 and 0.6763. The order to go long ge ts triggered first and almost immediately we place a stop order 10 pips under the upper…

Figure 8.24 EUR/USD Channel Example

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