Sometimes, in forex trading, the markets move up in what we called channels.
In this section, we will cover how to trade channels, what they are and how you can take advantage of them as a forex trader.
These are really easy to identify and to profit from when you learn to trade them correctly.
Channels are essentially the same as trend lines in terms of forex market structure, however, channels are moving in a similar distance between the higher highs and higher lows, which creates a narrow move upwards that can be easily drawn with two trend lines:
One on the higher highs
One on the lower lows.
The channel identifies an area in the market when the orders are being taken more than the other.
E.g) if the market is going upwards then the channel shows us that buy orders are being taken and vice versa.
However, channels have the same impact as supply and demand zones.
They show that orders are collecting so expect a move higher or lower if it breaks out from the channel.
We can use channels to help isolate potential trades as they generally trade towards a supply or demand zone. Which as you have learnt, are areas of the market with orders ready to be taken.
Let’s show you a basic example:
See how the price trades upwards in that small channel? This is what we look for.
Now, 90% of the trading world get this completely wrong.
A lot of times it’s because of inexperience or because they do not understand how the markets actually work.
With the example above, the market moves slowly and over time upwards (small candlestick patterns).
This indicates that the market wants buy orders to be filled as often as possible.
Normally the channel will be pushed in the direction of a deep liquidity area (accumulation zone or supply/demand area).
This is so that the smart money will be able to enter a trade.
Remember, we want to trade in the direction of least resistance and with smart money.
Most of the time, real channels will have a fakeout (a fake breakout) then move back towards the channel.
The fakeout is caused because it is near the supply/demand level and is there to purely reach the supply zone so the smart money can enter a short position.
This is why what we are teaching you is rare, yet valuable to become a better trader.
How to draw channels and identify them
To identify upward channels, we must scout the market and look for an upward movement that has small-to-equal-length candlesticks that move to higher highs and higher lows.
The higher highs and higher lows must not be significant enough to change the market structure or be volatile.
To find the perfect channel, you need to imagine a ball bouncing up and down like a zig-zag down a square tube.
If the channel looks like this, then we are in business.
To draw a channel you must draw them from their closes. NOT from their highs/lows like everyone else teaches.
We want to capture the extreme closes that are roughly equal distances from one another.
Similar to the upside channel, instead we are targeting the lower highs and lower lows.
We want to find areas where the price is trading up and down like a zigzag downwards.
This can be easily identified like the image below:
Just like the uptrend, the price bounces up and down the channel.
We want to ensure that the lines are on the most amount of closed lower lows and lower high candlesticks and that the lines are parallel.
When completed, we should have a nice channel that we can use to determine future trades.
How to trade channels
To trade channels, we must take a wider bird’s eye view of the channel in question.
We must look to the past to find any supply and demand trading zones or support and resistance levels.
This adds confluence to our direction of the trade.
To get the most accurate trades, with the lowest drawdowns, consistently we must have confluence in our trades.
So let’s look at the AUDUSD example we used earlier.
Let’s make this really easy to understand.
In this example, there is a lot going on but it is fairly straightforward.
We will go through this example left to right.
Step 1: We had identified the upward channel by drawing the lines. The lines must be parallel.
Step 2: We look for confluence, in this case, we have a supply zone from the 1-hour timeframe. Knowing this + drawing our channel correctly means we know if anything breaks out upwards then we know it’s a fakeout.
Step 3: Fakeout occurs, the buyers push the price higher towards the supply zone. The price touches the supply zone and then retraces back to the channel as expected.
Knowing that the price has moved away and the supply zone has been hit, we now know that selling will be more likely.
Step 4: We wait for the price to CLOSE below our lower channel line.
Step 5: Add our order to sell below the breakout candlestick low
Step 6: Go back to the channel and grab the crosshair – ctrl+f – then measure from the highest low close and the highest high close to generate the channel’s range. The value of this will be your initial take profit level. In this case, the range was 22 pips.
This is a fairly superior example to most because it has done all the key things for a large movement downwards:
Hit a large supply zone
Broke out of an upward channel
Broke the uptrend market structure
This is why confluence is sooooooooo important.
How to trade a downtrend channel
Step 1: We had identified the downward channel by drawing the lines. The lines must be parallel.
Step 2: We look for confluence, in this case, we have a demand zone from the 5-minute timeframe. Knowing this + drawing our channel correctly means we know if anything breaks out downwards then we know it’s a fakeout.
Step 3: Fakeout occurs, the sellers push the price lower towards the demand zone. The price touches the demand zone and then retraces back to the channel as expected.
Knowing that price has moved away, and the demand zone has been hit, we now know that buying will be more likely.
Step 4: We wait for the price to CLOSE above our higher channel line.
Step 5: Add our order to buy above the breakout candlestick high
Step 6: Go back to the channel and grab the crosshair – ctrl+f – then measure from the lower high close and the lower low close to generate the channel’s range. We have drawn this highlighting it in blue. The value of this will be your initial take profit level. In this case, the range was 32 pips.
We used two similar examples, with opposite trading opportunities.
Again, both showed tremendously accuracy thanks to understanding the forex market structure and market supply and demand zones.
None of this is luck. This is how you trade with accuracy and without stress.
You let the market unveil where the smart money enters.
Easy, right? :)