Trend channels are a highly useful technical assay and trading tool. Trend channels are piece of cake to draw and provide trade ideas and entry signals, with the proper strategy. Hither I’ll show yous what these technical tools are and a simple and useful tendency channel binary trading strategy.
A tendency channel is ii lines that run along the price highs and price lows of a trend. Typically these lines should run pretty shut to parallel of each other. If lines are converging on each other this is probable a wedge pattern, and if the lines are moving abroad from each other, this could be a broadening wedge. These are different patterns altogether, so ideally we desire the trendlines running pretty much parallel to each other. Figure 1 shows a trend aqueduct in General Electric (NYSE:GE) stock. The lines are pretty shut to parallel with each other, and the lines are touching nearly all the major price peaks and troughs.
Figure 1. Tendency Channel – General Electric Daily Chart
Drawing a Trend Aqueduct
A trend channel is a guideline, therefore, I adopt information technology to run along multiple high and low points, instead of running along merely the extreme loftier and low points. I similar this method because usually markets don’t move in perfect trend channels anyway. Rather, the price may movement only to a higher place or below information technology before reversing course and heading back to toward to the other side of the tendency channel.
Therefore, I employ “lines of best fit” when drawing trend channels. Don’t worry if the lines don’t perfectly contain all the price action, because it isn’t necessary to become quality trade signals.
Trend Channels Trading
Trading trend channels, when yous observe them, involves a surprising simple strategy. The first pace is to find a trending asset. And so focus on assets which are moving in a relatively rhythmic style, such as General Electric in effigy 1. Once the trendline are drawn the price seems to gravitate toward these lines; moving into the vicinity of the line and and then reversing grade.
Almost traders make an error in that they bound into trades too soon. They assume the toll will stay inside the trend channel, but every bit effigy ane showed frequently the price volition overshoot the trend channel resulting in a loss or a poorly timed trade. Some other problem is that traders wait for the cost to bear on i of the trendlines earlier buying (lower trendline) or selling/shorting (upper trendline). Equally effigy 1 showed though, markets don’t motility perfectly and it is highly improbable that the cost will move right to the trendline and and then contrary.
The post-obit trend channel trading strategy takes intendance of these 2 issues. It requires that you lot’re patient and let the market determine when yous make your trade, and not the other fashion around.
Trend Channel Trading Strategy
The rules for trend channel trading are simple. Once you’ve found an asset you want to trade and drawn your trendlines, wait for the toll to move toward one of the trendlines.
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, every bit soon as you run across one bar moving in the opposite direction (back toward the opposite side of the trend channel), take a position.
For example, if the price is dropping and comes very close to the lower trend line wait for the price to kickoff moving college (toward the upper trend channel line). When it does, accept a long position (buy call). Same for if the price pierces 1 of the lines. For example, if the price rallies slightly to a higher place the upper trendline, watch for the aforementioned reversal blueprint. You lot want to see the price reverse, for at least one bar, and when information technology does yous accept a short position (buy put).
Figure two shows a zoomed in shot with a couple examples in General Electric stock.
Figure 2. Trend Channel Trading Examples – General Electric Daily Chart
When the price doesn’t reach one of the trendlines the strategy can notwithstanding be used, but with a few cautionary notes. If y’all are going to trade reversal signals inside the trendlines, ideally these signals should occur within about 2% of one of the trendlines.
Figure 3. Tendency Channel Trading within the Channel
Effigy 3 shows an example where the price didn’t reach the upper line, but was still a tradable reversal, since it came with a few per centum of the trendline. In this instance, the trendline at the fourth dimension of the bar was intersecting at 24.75. Then ii% of that is roughly l cents. That means the price must accomplish at least 24.25 (24.75-0.fifty) in order to take the trade. The price reached 24.45, which is closer to the trendline, so the trade is taken.
By merely taking the trades that reach shut to the trendlines, touch the trendlines or slightly penetrate the trendlines we avoid much of the whip-saw like move that occurs toward the eye the channel. While it won’t always be the instance, the reversals are quite decisive nearly the trendlines.
If trading binary options your exit is direct frontwards: leave two to three bars after your entry. For example, if you are trading on a five infinitesimal chart, you lot’d want to choose an death that is roughly x to 15 minutes abroad.
If trading traditional markets such as forex or stocks, get out your position at 70% of trend aqueduct. For case if the trend channel is $three wide and you become long near the bottom y’all’d exit at $three×0.70=$2.25 from the low of the range. Effigy 4 shows an example of this, equally well as where to place a stop loss. A stop loss should exist placed below the recent swing low for long trades, and above the recent swing loftier for short trades.
Figure 4. Tendency Channel Trading Get out Point
If the trend aqueduct is up, ideally focus on long trades which will position you in alignment with the uptrend. If the trend is downward, ideally focus on short trades which will position you in alignment with the downtrend. Besides, watch for reversals that occur near the trendlines, and don’t worry about what happens toward the center of the trend aqueduct. Don’t assume a reversal will occur. Instead, wait for the cost to “bounciness” off a trendline for at least one bar before taking a merchandise.