Trend Channel Pocket Strategy

Screen Shot 2014-06-17 at 11.12.19


Video Transcription:

Hey, traders. Welcome to video 6 of the Advanced Forex Strategies course. This is Cory Mitchell. We are continuing our look at strategies. This one I call the trend channel pocket strategy, brought to you by

So, trend trading, as we know, is where the money is. There are multiple ways to trade trends. I probably use this strategy the most out of any of them that I’m going to talk to you about. We set orders after the U.S. close and before the U.S. open. It’s a high-probability strategy. By that, I mean it has a high win rate, a low risk relative to reward potential, and we can capitalize on multiple moves in high-probability trends. It can be used on all time frames, but ideally we’ll use this for swing trading since we’re looking for high-probability pockets to place our orders, and those occur at major reversal areas on longer-term charts, such as the daily and four-hour chart. Then we’ll drop down to an hourly chart to fine tune our entry point.

Trades last several hours to several days. I typically find if I put these out before the London open, a lot of times I’ll wake up in the morning… I’m on U.S. time so a lot of times by the time I wake up I’ve had several orders fill and they’re already closed out, so a few hours. And a few trades I’ve had last for a week or so. Just if volatility drops off and it just does nothing, then you may have these for a bit longer.

So, we only trade in the direction of the trend. This strategy can be used on most trending waves, but we can better analyze our probabilities when the price is moving within a channel. It can be a very crude channel. I’m going to show you what I mean by that. There are a lot of analysts out there that say stuff’s got to look perfect. That is simply not true. A crude channel will give you a good idea of sort of how much room you have to play with in your trades. So, this strategy we can set and forget. There’s no touchy-touchy. Once you put those orders out there, you let your stop get hit or your target get hit. The one exception we will talk about at the end is once your first target’s been hit you can adjust your stop to break even. That is it.

We simply want to let math do the work. As with the other strategies we have a target that is bigger than our stop, and usually we’re taking multiple positions so that our targets grow. If you recall from prior videos, and we’re going to look at it in this one too, our targets are usually 1.6, 2.6 and 3.6 times our risk. So, we are making more than our losses. If we win 50%, even 40% of the time, math does the work for us. We’re going to have a profitable strategy. So, don’t get too involved with these trades. Once you’ve set them out, just let the math work.

So, basically, we are looking for a crude channel on the four-hour chart. It doesn’t need to be pretty, as I will show you. We then drop down to an hourly or 30-minute chart if needed to fine-tune our entry point. For an uptrend, we place orders right in the pocket of a former low. So, what that means is we’re going to have a big up move followed by a big down move. We are placing our stop right in the pocket of the former low. This is like the congestion area around the prior low. When we look at the examples… I’m going to show you lots today because, like I said, this is a strategy I use a lot so I always have lots of orders of in this strategy, so you’ll have no doubt what that means.

We place stop 7 pips below that last swing low. I should point out you will be buying and selling. You’re going to be putting your orders out as the market is falling or when you anticipate a decline. That’s why we give it a little bit more room below the prior low than we did in some of the other strategies. These should look familiar to you. Again, the targets based on the other strategies: 1.6, 2.6, and 3.6 times the risk. So, if we have a 10- pip stop, which is going to be pretty unlikely with this strategy, it’s more likely to be about a 30 to 50-pip stop. But a 30-pip stop, you are looking at a 48-pip target for your first one, and then you multiply 30 pips times 2.6, 30 pips times 3.6 to get your progressive targets.

You must have enough open space in the channel, meaning that if the trend is up, we’re looking for an up channel. There must be enough room from where we buy to the top of the channel to actually have those targets. If we don’t have enough room, then we’ll just use the targets where there is enough room, such as 1.6 and 2.6. We should have at least that much room. If we don’t, then we probably shouldn’t be taking the trade. So, if we only have two targets, even if we’re taking multiple positions, such as four or five positions, we’re going to get them all out at 1.6 and 2.6.

So, the positions should be coming more familiar to you based on the other videos, but once again, risk must always be kept below 1% on all orders. Instead of taking five micro lots, for example, from one trade, we’re going to take five trades of one micro lots each. That way we can get them out at different targets. If we only take one micro lot, for instance, if you have a $1,000 account, typically your positions might be a bit smaller so you might only be able to afford one micro lot. In that case, exit at 1.6 or 2.6. Myself personally, if there’s a big stop on a trade and I only want to take one position, I will always take the easy money: 1.6. That way, I can get out and get onto another opportunity.

If you think about it in terms of, if you get out at 1.6, say your stop is 10 pips and you get out, your target is 16 pips, you’ve made 16 pips. If you try to get out at 26, your incremental game is… or if you get out at the 2.6 target, your incremental gain is only 10 pips. You’re better off finding another opportunity where you can make 16 pips, right? Because two 16-pip trades is better than one 26-pip trade.

We will be buying into selling, as I mentioned. It may seem illogical and some people may be absolutely devastated by this fact, because we’re always told never to buy into selling. Yet if you have a high-probability strategy and it works out, then I think you should trade it and not listen to what other people say. Also, we are looking at a longer-term time frame. So, while it is dropping on the short term, longer term we are buying at channel support or resistance. So, looking for a crude channel again for the downtrend. We’re looking for that down trend channel on a four-hour chart. It doesn’t need to be pretty.

In this case, a stop is placed 7 pips below the last swing high. Sorry, that should be above the last swing high plus the average spread. So, we’re looking at a downtrend. Wherever that last swing high was, that’s where you’re putting your stop and we’re expecting the price to stall before that point. Targets once again, 1.6, 2.6, 3.6 times the risk, assuming there’s enough open space in the channel. Again, I’m going to get to that when we look at some examples. If there is enough room, then just use the 1.6, 2.6 targets.

Once again, keep risk below 1% if we can, and in this point we are going to be selling into buying. Sorry, I forgot to change that around from the last slide. So, we are going to be selling into buying, and yes it’s illogical, but at the same time we are using a longer-term time frame that actually makes this a high-probability strategy.

So, let’s look at a few examples. You can see the AUD/USD moving in a nice channel here. First we are moving in an overall uptrend higher. We had this downtrend here. We are on a four-hour chart. This first one we wouldn’t have traded because at this point, right along the side of our chart we do not know if we are entering a downtrend yet. But, once we have these couple waves here, so this would have been a valid opportunity here. We would have gone short right in…this is what I’m calling a pocket. This area here.

So, you can see that’s the congestion area of the last high. So, as soon as the price fell away we would have put out an order to go short right here. We would have gone short there, stop above that high, and we would’ve been able to capitalize on that next move down.

So, let’s switch over to what’s going on right now. We have this channel higher. Yes, there were some opportunities in there too. We broke this channel to the downside. I have an order out here in this pocket here. Basically, that is the pocket. It is right in the congestion area of the last high. If you think back to the Fibonacci strategy that we had looked at last time, the last order we put out was at a 78.6% retracement level. This would even be deeper than that. So, we are looking at almost a 90% retracement level, and you’ll notice in Forex it is very common to have deep retracements.

So, we can see potentially a channel forming now. We are looking for a pullback to that line. It is very crude. We don’t know where this low is going to be, but basically we’re sort of extrapolating that a channel is going to form out here, but we do have this to go off of. We are moving lower, a downtrend, and we’re expecting a deep retracement. If it doesn’t come back here, that’s fine. It may come back to here and then drop, in which case we possibly look to move our order down to here, assuming there is a channel and we have enough room.

By open space, I mean this. If this price comes up to here, we have this resistance above it, meaning there’s not much open space above it because it would have to totally reverse the trend to get above here. But, we have lots of open space to the downside. We are in a downtrend, which means the open space is to the downside, so we have this entire distance. So, if the price comes back up here, so the price balances up here, this is the open space all the way back down to this channel low.

On this one, our risk is 24 pips. Our largest target is we go 1.6 times that, 2.6 times that, 3.6 times that. So, even if we multiply that by four, that’s 100 pips. Easily, we can hit those targets. So, if it comes up here, we definitely have 100 pips plus some extra, but we’re just going to get out. And you can see my orders here. If the price comes up here, my last order is going to be out here and we still have some room to the downside.

So, here’s a nice long-term trend on the British pound/U.S. dollar moving in an overall channel higher. Recently we had this fantastic trade, which I was able to get in on right near the bottom. My orders out now are not for that, but I was basing it on this one here. So, we have this major low here, a pocket. So, your order would have been placed right about in here.

One thing to note: if we have these long bars, I usually disregard them and will just use the major congestion area. So, that was likely news-related, probably not a lot of impact, so my entry point would have been right here at the top of the congestion area and my stop, below this congestion area here. Let me just move that out of there so you can see a bit better. So, this is the congestion area I’m talking about. So, on that trade, we were looking at about 30 pips of risk again, and we’ve seen a nice run to the upside on that one. So, all those profs and targets have been hit, which is why there’s no position showing, and we have a new order out right in this congestion area here.

So, we had a new low form. I’m looking to buy on a pullback to this area here, right along the channel bottom. Let’s keep looking at these. The USD/Yen. Channeling here, we wouldn’t have really looked to do anything. There’s no definitive trend direction. While we’re moving within a channel, we want to trade with some sort of bias. Once we had this run to the upside, this was a good trade down here.

Once again, look at this pocket. The price does not go through it. So, there’s your pocket there. Stop would have been 7 pips below this low. As you can see, it was not hit. We made higher lows, but the price moves right into that old pocket. It gives us an opportunity to get long and partake in all this potential up to the upside. Now at this point, for this trade, we wouldn’t have known that it was going to run this high, but we could have used this as an approximation. So, even if it only ran up to this former high, we still had a lot of upside to run.

And once again, with a 20 pips plus 7 pips for our stop, close to a 30-pip stop, lots of opportunity for… we would have already been out of all our trades at this point here. Once again, another opportunity here. We can see that the price pulls right back into this old consolidation area. I would have used both of these for this one since they were close together. But, we can see there’s a consolidation area right in here. The price pulls right back into it. The stop would have been 7 pips right below this low, and once again, lots of room to participate in the upside.

The reason we would take the longs and not the shorts is because we now have this upside bias. We’re making higher highs. We’re making similar lows, slightly higher, but the channel is up. This one, we still get a take in it. We would’ve been out of our trades, but once we don’t make that higher high anymore, I didn’t take any of these, and we’re waiting to see what happens over here. If this forms a more definitive channel to the downside, then we would be looking to take shorts potentially in this area here, with a stop above here and targets lower.

The USD/Swiss was moving in a nice channel up ’til this point. A little analytical insight here. As we can see, we touched the low, we moved to the high, moved lower, pulled back. On this one we couldn’t make it to the channel bottom, and then we had a strong rally. So, at this point, we are sitting on the sidelines. We are waiting to see what this does. Does this come back into the channel, or are we going to start a channel to the upside?

So, Euro/JPY. We had a triangle here, which we’re going to look at in future videos, another pattern that I like to trade, and basically we’re waiting for a pullback into this major congestion area here. So, at the end of this channel it was getting very congested, so lots of resistance in here, so we are looking to get short in this area here. Another potential trade. Since we’ve had a very strong run to the downside I may also put one out here.

This would be one I’d risk 1% on up here, with entries here, stop up here, and should be fairly easy for it to reach our targets here. This one might be more of something I’d risk half a percent on, just because we’re sort of in the middle of nowhere. We do have a nice trend channel going to the downside. And I’d put my entry here, stop 7 pips above this, and we’d be looking to get out down in this area here based on our 1.6 and 2.6 times risk targets.

British pound/Yen. Same thing. We have this channel to the downside. We broke out of it, meaning we had a very strong run to the downside here. We formed a new channel. I was able to get out of this one last night on this trade right here. As you can see, right in this area here we had a little pocket. So, that would be the pocket we’d want to be up short, nice little spike overnight, which filled the short position but didn’t exceed that high, ran to the downside. We were able to get out of all positions on this drop here before this rally.

Now, on this rally we are waiting for a move up toward the top of this channel area. I generally will go through and mark these whenever I see them just so I remember to put out orders on them. So, we are looking for one up in this area. So, I may take a small position here, right at this one with a stop above this level, and a larger position going short right in this pocket here, with a stop above.

You’ll notice that that would mean this has moved above the trend line, but we don’t care. If you look at how I’ve drawn these trend lines, they’re not against highs. It’s just a guide. We don’t care if they get broken a little bit. So, I’d still want to get short in that pocket there, and potentially this pocket here.

So, those are quite a few trades that should give you a good idea of this strategy. Like I said, I put these out every night. I can usually find about four or five at least to put out a night, so at any given time I probably have orders out on about 15 pairs. And a couple will fill a night usually. On a volatile night, you might get seven or eight trades in. Usually about half of them are already done by the time the trading day ends.

So, a little review. Every trade has a stop and a target. Put those orders out when you place the trade. Only risk 1% of your account in a pair. That’s including multiple positions to get at different targets. That’s all one trade. This way, even a string of losses won’t significantly draw down your account. We only trade in the trending direction. Even though you have the channel, if it’s a down channel, do not buy at the bottom. We only want to short at the top of a downtrend channel, and buy at the bottom of an upward trending channel.

Typically a pullback will retrace the entire last wave. That’s what we’re relying on. That’s why we can put our order right in that pocket, have a small stop 7 pips below or above the last high or low, and still have our targets at multiple times our risk. We only trade into wide-open spaces. We need that area in the channel to give us that high-probability trade.

Once again, we’re placing stops 7 pips above a recent high, 7 pips below a recent low. Targets, 1.6, 2.6, and 3.6 times our risk. Typically, we may get another pullback before the 3.6 target. If you’re already out at two positions, you can look to add, assuming you have enough room within the channel. But, always maintain the 1% rule. So, within a longer-term uptrend, you’re going to have smaller channels within it, so you can trade those waves by just sticking your orders right in the pocket.

Optional, you can reduce risk to break even on remaining positions once you’ve hit the first target. As I mentioned, nothing else changes. That is the only thing that we can change about this strategy. Let math do the work. Trading involves substantial risk of loss. Only trade with capital you can afford to lose. Test out strategies before using to make sure you can actually implement them. So, use this in a demo account. Put out orders each night; see how it works out for you. Maybe fine-tune the approach a little bit. Are you drawing the trend channels the right way? Are you trading in the right direction?

And then relax. This strategy only takes about 20 minutes a day to place orders once you’ve practiced spotting opportunities. So, take time to practice it because it pays off. Until next time, happy trading.

Comments are closed.