Channel Bounce Forex Strategy

Introduction

The channel bounce is one of the easiest forex trading strategies that any trader can use to make money. This is especially suited for beginners because of its simplicity and ease of use. It simply follows the principle of the price action moving in a trend until it ends. Where this strategy ends, the trendline breakout strategy discussed in one of the forex trading courses will begin.

Price channels form when the highs and lows of price action can be connected with trend lines that are found to be parallel to each other. Channels tend to follow the trend, so we have ascending channels in an uptrend, descending channels in a downtrend, and transverse channels in a sideways trend. Once a channel has been traced, the price action will stay within its boundaries until it either breaks out in the trend direction, or undergoes a reversal and breaks out of the opposite trend line (which we captured in the trendline breakout strategy).

Indicators

The only supporting indicator used for this strategy is the coloured MACD histogram. Though not strictly an indicator, we also use the channel tool to draw channels against price action accurately.

The Strategy

The trend is the trader’s friend until it ends, and the channel is a basic tool which helps trades benefit from this basic forex trading dictum. The key is to look for areas where price action seems to be hemmed into a channel, apply the channel tool to confirm this and if the trend lines formed touch at least three price highs and three price lows, you are good to go.

Once the channel has been traced, it is trade time.
1) Long Trade

The long trade can only be traded with the ascending channel so that the trader can follow the trend. The price action is observed until it is confirmed that it will touch the lower trend line without breaking it. This is confirmed when the price action candle touches the lower trend line but closes at, or above the lower trend line. The long trade is opened at the open of the next candle.

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Long Trade Setup on Ascending Channel

On this snapshot, we see the three points where the channel lower trend line is touched by price action. At this stage, the channel projects into the future with no price action. The trader must then wait for price action to touch the channel’s lower trend line once more without breaking it, before executing the trade.

Short Trade

The short trade can only be traded with the descending channel so that the trader can follow the downward trend with the short trade. The price action is observed until it is confirmed that it will touch the upper trend line without breaking it. This is confirmed when the price action candle touches the upper trend line but closes at, or below the upper trend line. The short trade is opened at the open of the next candle.

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Short Trade Setup on Descending Channel

On this snapshot, we see the three points on the upper trend line where the channel is touched by price action. At this stage, the channel projects into the future with no price action. The trader must then wait for price action to touch the channel’s upper trend line once more without breaking it, before executing the short trade.

It goes without saying that the longer time frames will deliver more profits because the distance in pips between the two trend lines will be much wider.

Stop Loss

The channel makes it very easy to set a stop loss. When the trade is executed, place the stop loss a few pips on the other side of the trend line away from the trend. So in a long trade, the stop loss should be set below the lower trend line at the entry area, while the stop loss is set above the upper trend line around the entry area.

Take Profit

The Take Profit area is generally the opposing trend line.

Conclusion

This strategy provides an opportunity to profit from a simple system again and again. It is suitable for use by beginners and once the procedure for tracing the channel and recognizing correct entry parameters have been mastered on demo, the strategy can be deployed to a live account with amazing results.

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