Mini Channel Breakout Forex Strategy
Hey, Traders. Welcome to video three of the Advanced Forex Strategies course. This is Cory Mitchell. In this video, we are looking at mini channel breakouts. This is a strategy we can use on all timeframes. This video is brought to you by Investoo.com.
So, a little review from the last video. Trend trading is where most of the money is. There are multiple ways to trade trends, but this is one that you want to have in your arsenal. It gets us in early, keeps risk small, and profits are larger than losses. It can be used on all timeframes, for day trading or swing trading.
So, an uptrend occurs when the price is making higher swing highs and higher swing lows. This should sound familiar if you watched the last video. If not, we will go through this concept of trends again in this video. Downtrends occur when the price is making lower swing lows and lower swing highs. We only trade in the direction of the trend with these strategies.
This is a relatively simple setup, but it doesn’t occur as often as we’d initially suspect. But when there is a very strong trend, it will occur frequently, and that’s mostly when we want to trade because it provides us a lot of opportunities to get in on that trend and make money. We’ll look at other trend trading strategies as well, so that no matter what the trend looks like, you have a way to trade it.
So, during an uptrend, we’re waiting for the price to pull back. We avoid trades when the trend on our timeframe isn’t clearly visible. A line must be able to connect the high point of at least four bars in the pullback. When this occurs, typically the pullback has a channel-like appearance. Sometimes, it’s not beautiful, but we at least need those four high points in the bar to pull back to be able to connect. This allows us to draw a line and a breakout point.
If it doesn’t sound clear, in a moment it will, when we look at a few examples. We buy when the price breaks above that channel in the trending direction, back in the trending direction. We’re looking for a certain look, a counter-trend move, where the breakout is clearly visible.
Once we’ve drawn that channel, our stop goes one pip below the low of the channel, following the breakout price. Once the price is broken out, sorry. We’ll place that stop one pip below the channel low. Our target, similar to the last video, we’re using the 1.6 and 2.6 times risk. So, if we have 10 pips of risk, we’re looking for our first target at 16 pips and another one at 26 pips. We do this by taking two positions instead of just one larger one. If you can afford to take two mini lots, take two positions of one mini lot each, so that you can get one out at each target.
During a downtrend, we wait for the price to pull back. We avoid trades when the trend isn’t clearly visible. A line must be able to connect the low point, in this case, of four bars on that pullback. So, we sell when the price breaks below that line. So, it will be moving back in the trending direction, and we want to get in on that.
The stop goes one pip above the . . . Sorry. That should say high, one pip above the high of the channel, because the price will be coming down. The channel will be going up. So, we want to put the stop one pip above the high of the channel. Our target is 1.6 and 2.6 times our risk.
Once again, if we can take two positions instead of one larger one, we will do that. Keep in mind from the last two videos, we want to keep risk to 1% of our trading account per trade. So, if we have a $500 account, we’re only risking $5. Pretty tough to do. But if we have a $3000 account, we’re risking $30 per trade. So, keep that in mind.
So, let’s look at a few examples. I’ve highlighted a few in the Euro/USD. A couple weeks back, we had some pretty good action going. We had the Euro flying higher, and then a big reversal back to the downside. So, this is what we talked about. When we have very strong movement, we’re going to see lots of these little mini channels.
So, here, strong move higher, proceeding from a longer term uptrend. So, you’re looking for it. Notice here, I’ve set . . . This is only three bars. So, technically this isn’t a valid setup. We want four, but we are on an hourly chart. You could drop down to a 30-minute chart. And how many bars would that be? We have three bars here on the hourly chart. That means you’d have six bars. If you get four that line up, you have a valid signal.
So, you can . . . It’s not cheating. You just drop to a different timeframe for certain setups if you see it and you want in. But basically, we’re looking for four points, just so that we know that we have a solid resistance level there. When it breaks, we know we’re [inaudible 00:05:08]. So, this one would have been a great trade here. As soon as it broke, it flew to the upside.
Here, pause again, not really . . . Can’t really draw a channel around this. We sort of could, but here we have the lows that connect. The ones on the bottom don’t really matter too much. You can put them on if you want, but we know from strategy that we’re going to be putting our stop one pip below. So, we don’t really need the channel.
So, we are going to be entering here as soon as it breaks out. We do not wait for bars to complete. As we can see, if we would have waited for this bar to complete, the price would have been way up here. As soon as it breaks that line, we get in. So, our entry point is right around here, looking at about 13.8 pips of risk here. We take targets at 1.6 and 2.6 times our risk, 13.8 times 1.6. So, our first target would be at 22.08 pips or 22.1 pips.
Then, this one is 13.8 times 2.6. So, this one would be at 35.9 pips. If you notice from the last video and from this one, typically the 1.6 target will be very near the former high. It just seems to work out that way. It will be in a close proximity to the former high. That way, if the price fails to go higher and makes a double-top type formation and then proceeds lower from here, we at least got that one target out near the former high. Because once this pops, there’s a pretty good chance that it’s going to at least go back and test this former high here.
So, we had the pop higher. It’s testing it. In this case, it worked out well. It continues to go higher. While we were in this trade, you could have had another opportunity here. One, two, three, four. We have four bars that form a little channel type here. This is one of the ugly ones I talked about. If we were to draw a line, it doesn’t really have a channel-like appearance, but this line does. That’s the one we’re looking for. We have a clearly defined level that we can watch for a breakout above. When it does, we’ll watch for the pop higher.
These are a little bit subjective. You have to be in there in real time, and you have to be able to say, all right… We had this nice strong pop higher. I do have this level. Do I want to trade it if it breaks out? Same with here. Same with here. So, we had this pop higher, a pullback. Do I want to trade this if it breaks out?
This would have been a very aggressive trade after the strong uptrend, but it is a valid signal because we have a lower low. We’ve had a number of little movements here, and the price drops below them. Then, on the rally higher, we are making a lower high. So, this is a decision you have to make in real time. Once you draw this line, the price is moving up if we go out to the very right-hand side of the chart, like this was happening in real time.
The price is creeping up. We’ve had this strong run-up. What do we want to do? We have to decide. All right. If this breaks below this line, am I going to take the short? You say it’s going to cost me nine pips of risk. Once this breakout occurs, yes, I’m going to take that trade. So, we take it. We’re looking at about nine pips of risk because we’re putting our stop one pip above the former high of the channel.
So, this was the high of the channel. This one we actually could have drawn because it does actually have a channel-like appearance. So, here’s the high of the channel. Here’s our entry point. We’re looking at about nine pips of risk if our stop goes right here.
This one would have worked out quite well going into the weekend, if we had held it over the weekend. Our initial target, 1.6 times 9, is 14.4 pips. We didn’t quite get there before Friday. So, if you have a nice broker, the next morning you would have made 35 pips instead, or on Monday morning, Sunday night.
Same with the next one, 9 pips times 2.6, which is our next target, 23.4 would have also got filled at the following open, if you have a nice broker. Some brokers may just pocket that difference. But 9 pips of risk, entry point right here on the breakout.
Here, we have one that would have worked out. We have this nice run to the downside, have the gap on Sunday, channeling higher, well-defined area here where we were looking to go short. We would have gone short right in here when the price dropped below. Stop would have been placed right about there. So, we have this nice channel-like appearance, but we would have been stopped out on it.
Just moves above our stop, and then proceeds to go in the direction we expect. This is Forex trading. We cannot avoid these trades. I don’t even try to avoid these trades because we know that they will inevitably occur. When we learn a strategy, we’re expecting that it will work about six or seven times out of ten, hopefully at least four or five times out of ten. That way, we’re making 60%, at least 60% more on our winners. So, even if we win 50-40% of the time, we still should be coming out ahead. Therefore, we do not need to try to avoid these. This is going to happen. Do not be frustrated by it. Just look for another opportunity.
So, a little review. Every trade has a stop and a target. Put these targets out when you place the trade. Only risk 1% of your account in any one pair. That includes your taking multiple positions instead of one larger position, but you’re still limited to that 1%. That way, even a string of losses won’t significantly draw down your account.
Only trade in the trending direction, following a pullback. That pullback must have a channel-like appearance. Remember, it can be ugly, but you at least need to have that clearly defined breakout point. If it’s not a clearly defined breakout point, don’t take the trade.
Place a stop above the high of the channel for a downtrend. Place the stop below the low of the channel for an uptrend. When possible, keep risk below 1%, split up your positions, and take profit at two targets. These targets are 1.6 and 2.6 times your risk. Trading involves substantial risk of loss. Only trade with capital you can afford to lose. Trading with capital that you absolutely need will result in an outcome that you do not like.
Test out strategies before using them to make sure you’re actually able to implement them and that they work for you. Use a demo account. Trade this. Work on it. Do it in real times that you can actually see these channels forming. Trade the breakout. Set your stops. Set your targets. You can get good at it before actually using real money. Until next time, happy trading.