Trend Channel Trading Strategy
Forum Trend Channel Trading Strategy Trend channels are a highly useful technical analysis and trading tool. Trend channels are easy to draw and provide trade ideas and entry channels binary options, with the proper strategy. Trend Channel A trend channel is two lines that run along the price highs and price lows of a trend.
Typically these lines should run pretty close to parallel of each other. If lines are converging on each other this is likely a wedge pattern, and if the lines are moving away from each other, this could be a broadening wedge.
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These are different patterns altogether, so ideally we want the trendlines running pretty much parallel to each other. The lines are pretty close to parallel with each other, and the lines are touching nearly all the major price peaks and troughs. Figure 1. Trend Channel — General Electric Daily Chart Drawing a Trend Channel A trend channel is a guideline, therefore, I prefer it to run along multiple high and low points, instead of running along only the extreme high and low points.
Rather, the price may move just above or below it before reversing course and heading back to toward to the other side of the trend channel.
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Trend Channels Trading Trading trend channels, channels binary options you find them, involves a surprising simple strategy. The first step is to find a channels binary options asset. Then focus on assets which are moving in a relatively rhythmic way, such as General Electric in figure 1.
Once the trendline are drawn the price seems to gravitate toward these lines; moving into the vicinity of the line and then reversing course.
Most traders make an error in that they jump into trades too soon. They assume the price will stay within the trend channel, but as figure 1 showed often the price will overshoot the trend channel resulting in a loss or a poorly timed trade.
The following trend channel trading strategy takes care of these two issues. Trend Channel Trading Strategy The rules for trend channel trading are simple.
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The simplest trades are when the price comes very close to one of the trendlines, or the price moves through it. When either of these scenarios occurs, as soon as you see one bar moving in the opposite direction back toward the opposite side of the trend channeltake a position.
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For example, if the price is dropping and comes very close to the lower trend line wait for the price to start moving higher toward the upper trend channel line. When it does, take a long position buy call. Same for if the price pierces one of the lines. For example, if the price rallies slightly above the upper trendline, watch for the same reversal pattern.
You want to see the price reverse, for at least one bar, and when it does you take a short position buy put. Figure 2 shows a zoomed in shot with a couple examples in General Electric stock. Figure 2.
Figure 3. In this case, the trendline at the time of the bar was intersecting at That means the price must reach at least The price reached By only taking the trades that reach close to the trendlines, touch the trendlines or slightly penetrate the trendlines we avoid much of the whip-saw like movement that occurs toward the middle the channel.
Exiting If trading binary options your exit is straight forward: exit two to three bars after your entry. Figure 4 shows an example of this, as well as where to place a stop loss.
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A stop loss should be placed below the recent swing low for long trades, and above the recent swing high for short trades. Figure 4. Trend Channel Trading Exit Point Final Word If the trend channel is up, ideally focus on long trades which will position you in alignment with the uptrend.
If the trend is down, ideally focus on short trades which will position you in alignment with the downtrend. Top Brokers.