This journal entry is dedicated to Channel Trading Strategy. In this article, I am going to explain the steps of the strategy and show how to put it into practice. Just to mention, the strategy is very simple and could be even used without any technical indicators.
Channel Trading Strategy Summary
The strategy consists of several simple steps and is based on a price action rather than any trading indicators. So, putting everything into a step-by-step instruction, the strategy can be broken down into the following:
- Identify the trend. The first step is to identify the trend. You can use any methods you’d like such as moving average, price action etc.
- Draw the channel. A channel is a path identified by trend lines. Usually, it’s confirmed by three points of contact on both upper and lower edges.
- Wait until the price hits upper or lower edge of the channel. It’s recommended to trade with the trend rather than against it – i.e. place PUT when the trend is downwards and the price touched the upper edge of the channel, or place CALL when the trend is upwards and the price touched the lower edge of the channel.
With regards to expiry time, it’s recommended to set it as 4-6 candles depending on the timeframe you are using. Once the option is placed, it’s time to wait until its expiration.
You should also watch for channel breakouts. Generally speaking, if a candle closes above the upper channel edge in a downward trend or below the lower channel edge in an upward trend, this is an indication of a breakout. In such conditions, it’s better to avoid entering the trade.
The first trade was taken with a currency pair – USDJPY. Upwards trend was identified on the chart. The volatility on the market was considerable at that time. According to the strategy, the channel was drawn after trend identification. Once the channel was confirmed and the price touched the lower edge of it, this made a perfect opportunity for placing a CALL option and that’s what was done.
The option expiry time was in around half an hour. Once that time passed, the option expired in the money which made a profit of $37.5
This trade was taken with another currency pair – USDNOK. Again, the upwards trend was identified on the market which potentially could make a CALL option opportunity. After the channel was drawn and the price hit the lower channel line, CALL option was purchased.
The option expiry time was set to around 20 minutes with a 5-minute candlestick chart used for analysis. Once the option expired, it made a profit of 65% which equalled to $32.5. It’s worth mentioning that the price actually broke above the upper channel line which demonstrated a channel breakout in the direction of a trend.
Finally, this trade was taken with AUDUSD currency pair. This is a demonstration of how the trades shouldn’t be entered with channel trading strategy. A downwards trend was identified on the market making a potential for going short. However, I entered a trade too early when it hadn’t touched the upper channel line yet.
Basically, this trade was a gamble and entered in a wrong time period making a good example of what might happen when the option is placed too early or too late.
Channel trading strategy is a valuable acquisition for traders. Basically, this variation of trend trading strategy is definitely worth trying. It’s quite simple and shouldn’t make any troubles for beginner traders. Give it a try and let me know about your progress in comments below.