The Price Channel is one of the important analytical factors trusted by many Price Action Traders. It is a widely used and popular basic tool. But to apply it correctly is not easy at all.
Today we will talk about using it in combination with Price Action to create a trading strategy with a high winning rate.
Do you know how to draw a trendline and how the trendline supports trading?
If we keep the old trendline and draw a new one in parallel so that most of the price is between the 2 trend lines. We call those 2 trendlines Ơrice Channel or Trend Channel.
A price channel is a price range created by two parallel trendlines pointing up or down. Most of the time the price of the current trend moves within it. It is a useful tool in Price Action analysis used to identify buy/sell points and good profit-taking zones in trading. Now let’s get into effective ways to trade with price channels.
Price Action trend trading with Price Channel
As the heading suggests, this is a trend following strategy. Therefore, the prerequisite is that the market is in a clear trend. And you can draw a price channel with 2 parallel trend lines.
Draw a bearish trendline by connecting the 2 most recent swing highs.
Draw a line parallel to the line just drawn and move it so that it goes through as many swing lows as possible. We will get a bearish channel.
The price rebounds to retest the trendline at the congestion level. Thus, we have 2 confluence factors for a DOWN order. The upper edge of the bearish price channel + the congestion level
When entering an order on the upper edge, we will exit the order when the price touches the lower edge of the channel.
Price Action reversal trading with price channel
When the price completely breaks out of the channel (lower edge of the bearish channel, or the upper edge of the bullish channel). It is a sign of trend exhaustion. The breakout of that channel is only due to the final bulls (or bears) trying to push the price back to the old trend. But they fail and the price quickly bounces back in.
We can use reversal trading when encountering cases like this. However, there are still a few things to ensure to minimize the probability of losing that trade.
Make sure that the price channel goes against the trend of the higher timeframe. For example, the H1 frame has a bearish price channel, then the H4 must be an uptrend to enter. Thus, the downtrend of H1 is just a retracement in the uptrend of H4. If we catch the reversal of this retracement wave, we can make huge profits from the whole new up wave.
The steeper the channel is drawn out, the easier it will be to break.
The rejection is strong when the price breaks out of the channel, like the Outside Bar setup of the example above.
Trade in range
You can use dynamic price channels like Bollinger Bands to trade sideways very well.
The following example uses Price Action combined with Bollinger Bands to trade in range
The price touched the band 3 times without breaking it, indicating that the market has turned sideways.
Set up to enter a DOWN order right below the lowest low of the Bearish Pin Bar candle.
Exit the order when the price meets the lower band.
Of course, I do not prioritize trading sideways markets because the potential profit is not attractive.
The price channel can also create very nice breakout setups to enter trades with a high winning rate. However, evaluating the breakouts requires experience to avoid False Breaks.
Pay attention to volume if you use the trading breakout method. True breakouts are often accompanied by increased volume.
The breakout candles must be longer than the neighboring candles.
The idea is to Buy as soon as the price breaks out of the channel. To take advantage of FOMO momentum to make short-term profits.
You can see that with just a simple price channel, we have 4 types of setups to enter orders. And they all give us an edge before starting to trade. However, you should never try to take full advantage of all the settings that I have shared. Only choose one setup to master it, to avoid overtrade and increase the highest probability of winning.
Join the Olymp Trade Club Signal Group: https://t.me/olymptradeclub19