Using Trend Channels to Trade Forex

Using Trend Channels to Trade Forex by Mo4Forex.com

I’ve been learning a lot about trend lines and their significance to my daily trading in Forex. By drawing a proper channel line that the price follows I am able to find possible swing highs and lows telling me I should start to look for possible entries, exits, take profit and stop loss orders. Most trading platforms have a draw channel function, if not, well, I have prepared some examples I’ve recently used myself. Channel lines are drawn on the 3 points, A (high) B (low) C (2nd High) or vice versa in a downward trend. These lines are basically just parallel lines, however, in between there are lines of demarcations at 25% intervals. I’ve noticed that the price action usually fluctuates at these levels more so than at other points, for instance in the second image here, you see the price was on it’s way down from the upper channel and finds support at this middle line. When the price hits the upper or lower channel and can not retrace back to the correlating level, volume has dissapated and/or the trend channel might be broken. I know a few times I’ll draw a trend channel only to have that channel violated with price action that breaks the channel. But, for the most part, I have been able to make quite a few trades that I call, “riding the waves” in between channel lines. 5 to 10 minute scalps that make 10-15 pips (minus spread) 5 or 6 times per pair. This method has its faults I’ve noticed, especially when counter trend trading, as every time I buy into downward market (even on a clear retrace) it is a much “longer haul” than simply trading with the direction of the trend.

To the left is an example of how you can use a Trend Channel and Trend Line to enter a short position in anticipation of the price bouncing off this top trend channel line and reaching the bottom channel within a certain period of time. I simply don’t enter when the price hits this top line, I wait for other conditions to line up together then I get in at a point where I think that trend is over (trend lines help for that). After I get in, I set my stop loss somewhere below the bottom channel and my take profit a little below the upper trend channel line. Depending on the time frame and amount of pips I’m going after, this can take anywhere from 1 minute to days! It all depends, but in this example, I’m looking to make a profit in 15 minutes or less, so I’m trading on a 2 minute chart.

To the right we see how this method actually earned whoever is smart enough to trust it lots of pips in a single day. The last section of this post shows you how this method works on a shorter time frame (all but essential if you want to find the best place to enter or exit). Results will vary based on how patient the trader wants to be. I for one did not ride this short position for too much time, but I wanted to make a note of it because it really is a beautiful thing to behold when it happens. The trend line approach in conjunction with this also helps you find an exit, but in this trade, it was pretty steep price action to be able to draw a viable trend line to the downside here, at least that’s what I felt.

Below is an example of how Trend Channels don’t always work, but probably because of human error. I know for sure this was my own fault because I entered a trade during low volatility hours, and I was counter trend trading, which will always experience more resistance than a position that is with the trend. Even though the price eventually hit the upper channel, it wasn’t before my stops were hit for a loss during a retracement. I was however up 10 pips twice but had my Take Profit at 12 or something, it was a long time ago, but I remember almost turning a profit here.

Example of how trend Channels don’t always work

Another important thing I learned that really does make you money is the use of Trend Channels with Trend Lines. Trend Channel lines can be used with Trend Lines (some use the term Trend Capture Lines), which allow to spot the end of one trend and the begginning of another. Here you see I drew a trend line that on the lows of each bar, and when that line is broken, it’s a good indication that the trend is over; this can work on almost any time frame, including tick charts. Some say more effectively on tick charts, but I’m still trying out both.Trend lines, just like trend channels work on all time frames, but most effectively on longer time frames. It involves drawing a line above or below all the closing prices in a trend. In the example on the left, this is a drilled down version of the channel I was looking at above, we see the price reach the upper channel and at the same time begin to break the trend line. Now, this shouldn’t be an automatic signal to sell, I looked at a few other factors, including volume, time of day, and balance point line. And, if I had just jumped right in, I’d be waiting hours for the price to go in my direction, as light volume couldn’t push the price too far in either direction. If I had been short from that point I’d have to ride out a retracement that might have hit my stops for a loss.

Instead, as we see on the right, I could have waited for the volume to pick up, at which time I’d have to contend with the idea that the price might go back up, to the channel once more, and in truth, there’s nothing that would have prevented it in theory, which is why it’s important to have reasonable stop loss levels when looking to short here. But in reality, what happens is volume picks up more to the sell side and over the next 24 hours the bottom trend line is touched again. Now, when looking for an exit, it would be wise to have a trailing stop based on what ever the situation calls for, and to draw another trend line in the opposite direction, when that line is broken, it might be a good place to sell, especially if it is near the bottom channel. It’s all a matter of how patient I want to be, am I going to freak out every time the trend line is broken for a minute or two, or will I go by what I see and trust the trend? I put in that little comment, this isn’t magic, to remind myself that this should be common sense, the trend is my friend, trend channels help find the trend, trend lines help pinpoint where to find entries and when to exit.

Best Times To Trade Forex

Ok, now it’s time to set my alarm clock to some important times here. I’ve missed alot of opportunities trading Forex because I did not have these times imprinted on my mind! We should all know these times like the back of hour hands if we want to be serious Forex traders. I’m sure professional traders have a certain time period at which they trade, negating opportunities in other times, but sticks to a strict Forex method that includes not straying from your plan. If we are going to enter a respectable number of trades that are winners, we need to enter trades at times when we are more certain the pair has enough strength or weakness to hit our target. Therefore it is only common sense we should enter our trades when the trading volume for the pair or pairs is the highest. During the times when the major world markets overlap, we find the biggest increases in volatility (relatively speaking) and are most likely the most opportune times to trade Forex.

At any given time, somebody somewhere in the world is buying and selling currencies. As one Forex market closes another Forex market opens. Market hours frequently overlap, and Foreign Exchange continues around the clock with little respite.

Here’s some interesting facts I’ve collected about Forex hours. Forex is 24 hour market and it starts from Sunday 5pm EST through Friday 4pm EST. Rollover (or swap) is calculated each day at 5pm EST.Forex Trading begins in New Zealand, followed by Australia, Asia, the Middle East, Europe, and America The US & UK account for more than 50% of the market transactions. There are three Major Forex markets: London, New York, Tokyo. Nearly two-thirds of NY activity occurs in the morning hours while European markets are open. Forex Trading activity is heaviest when major markets overlap.

Forex markets are open worldwide with the following schedule:

• New York Market trade times: 8am-4pm EST
• London Market trade times: 2am-12Noon EST
• Great Britain Market trade times: 3am-11am EST
• Tokyo Market trade times: 8pm-4am EST
• Australia Market trade times: 7pm-3am EST

Forex markets have also these timing characteristics:

Tehnically, Forex worldwide trading begins in New Zealand at 4PM EST, followed by Australia, Asia, the Middle East, Europe, and the United States. Since nearly two-thirds of NY activity occurs in the morning hours while European markets are open, this is probably the most active time to trade. Too bad most people around where I live are dead asleep.

Forex market volume fluctuates all day, but certainly expereinces a peak when the Asian market (which includes Australian & Kiwi markets), the European market and the U.S. market are all open simultaneously, even if it is for only a few minutes. More notes on trading hours coming soon. his article and topic also tie in closely with my questions on which Forex Pairs are the best to trade because of volatility.

Candlestick Patterns: Turning Investor Sentiment into High Profits

High Profit Candlestick Patterns
Turning Investor Sentiment into
Profits
By Stephen W. Bigalow

(from www.mo4forex.com) I’d like to make this post as a reminder to buy this book in the coming weeks, it comes highly recommended by a few trading experts I’ve come across along the way. I learned to never really trust alot of Amazon reviews, simply because (facts aside) reading is a very subjective activity, much like film, or politics, so where one sees a crappy book, I might see something I didn’t know before.

I’ve read alot of the Japanese Candlestick pattern example sites and their take on the significance of each pattern and what it might do to the currency pairs in the Forex market. I’m wondering if this is enough by way of learning abou Candlestick patterns or is knowing the theory behind these patterns relevant to trading. I’ve heard some say ignore patterns because the price can go any which way, turning what you thought was a head and shoulders pattern (and you’ve positioned yourself accordingly) only to have the market go against you.

Below I have included two excperts from Amazon’s reviews, one is good and sounds honest from a trader who has reviewed multiple Forex books, and the other is a bad review from a first time reviewer. Use your own judgement on weighing the importance of these reviews

The ony downside to this Forex Book is it’s price, $90+ new, $60 used, so doing a little research is advisable before buying. Inevitably, if you know nothing about Forex and Candlestick Patterns, this book could be useful to you despite the price. But all 432 pages might take a while to read for me, even on weekends.

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