A dynamic price channel is a formation of prices in the currency pair that indicates a potential movement. As the currency pair moves like a zigzag, there are lower highs and higher lows in the market that creates possible swing points. Traders can make a profit by following these swing points or a breakout from these swing points.
07 July, 2020 | AtoZ Markets – A dynamic price channel is a parallel channel in the price chart that touches price swings. As the currency price moves with a zigzag formation, it creates lows and high, allowing trendlines to touch and create a dynamic price channel.
Besides, static support and resistance levels, dynamic levels work as significant levels. Therefore, you can trade these levels with essential price action tools to make a profitable return.
Identify the Dynamic Price Channel
The forex market moves like a zigzag. Therefore, you will find a minor bearish correction in a bullish uptrend and a bullish correction in a bearish downtrend.
To identify dynamic price channels, you should know the basic knowledge of trend formation. The uptrend has new higher highs, and the downtrend has a new lower low. You can connect those lows and highs and get a trend line. However, the trendline sometimes has a parallel reflection from the downside and the upside like the image below:
Trend lines work as dynamic support and resistance levels, so, we can use them as reliable trading tools.
In the following section, we will see how to use the dynamic price channel in the forex market to make a profitable trading strategy.
Dynamic Channel Trading Strategy
We can use dynamic price channels as a significant support and resistance level. Later on, we will use price action tools in the chart and the market context to create a profitable trading strategy.
In the below section, we will see a trading strategy using dynamic price channels.
Channel Trading With Price Action
In this trading strategy, we will use a price channel to identify the market direction and handle the price action tool to enter the trade at the right time.
The forex market is run by prominent institutes and central banks who follow higher timeframes only. Therefore, whatever we see in the daily or hourly chart, we should see what the price is doing at a more upper time frame.
The first step of a dynamic price general trading strategy is to identify the location of the price. Open the chart in daily and weekly timeframes to identify the key support and resistance areas. Key support and resistance areas are potential top and bottom from higher time frames from where the price rejects and makes a decent movement.
If you see the price to move from a key support area, you should focus on buy trades only, and if you know the price to move down from a key resistance area, you should focus on sell trades only. Once you’ve got the price towards your desired direction from the market context, you should move to find the entry.
Entry: Identify a bullish market and find the price channel that creates higher highs. As we know, in an uptrend, there will be a minor downward correction. It would help if you connected all the trendlines from the last two lows and highs. Identify the price that moves to the downside and reach the trendline support. Wait for the price for rejecting that line with a reversal candlestick. Enter the trade only when the candlestick closes.
Similarly, in a downtrend, you should focus on sell trades only and enter the sell trade when there is a price rejection on the chart with a candle close.
Stop Loss: Setting a stop loss is easy for this trading strategy. The stop loss should be above or below the reversal candle with some buffer. For a sell trade, you should put the stop loss 15 pips above the reversal candlestick to avoid a usual market noise.
Take Profit: The channel trading strategy is based on trade continuation patterns. Therefore, you can extend the take profit level if the market condition supports you. The first take profit would be the next event level from which the price is likely to reverse. However, you should monitor the momentum of the movement.
After taking an entry, if you see the price to move with an impulsive pressure, there will be a higher possibility that the price will move further beyond the next event level. In that case, you should wait for the next event level to take full profit. Furthermore, it would help if you focused on how the price reacts at the significant support and resistance level.
Channel Breakout Trading Strategy
There is a profitable trading strategy on the price breaks above or below the channel.
It would help if you waited for the price to break the channel and make a retest. The speed of the Breakout is essential as it indicates the sustainability of the Breakout. Prominent financial institutes and central banks drive the forex market. Therefore, any significant breakouts mean the big players’ intervention in the price, which is very important to rely on the movement. As a trader, we are trading on probabilities. Therefore, we should focus on the possibilities that are backed by institutional traders.
Entry: After finding the Breakout, wait for the price to come at the dynamic trendline support and resistance area with a corrective speed. When the price will reach the dynamic support or resistance area and reject it with a reversal candlestick pattern, you should enter the trade. Make sure to open the trade as soon as the candle closes.
Stop Loss: Setting a stop loss is similar, which we have mentioned in the above section. A 10 to 15 pips buffer is significant for every stop loss as the price in your trading chart might not be the same as other charts. Furthermore, brokers sometimes create false moves to eat your gains, not more than 5 to 10 pips.
Take Profit: To close the trade, you should wait for near term support and resistance level. If the movement is powerful towards your desired direction, you can extend the take profit level by reading the market context. However, you can close full trades or partial trade at the near term event level.
In the above section, we have seen how we can profit from a dynamic channel bullish and bearish trading strategy. However, the forex market is full of uncertainties. Therefore, there is a possibility that your profitable trades might hit stop loss. So, besides developing a trading strategy strictly, you should focus on how to manage the trade.
As a part of the trade management, you should put your stop loss at breakeven as soon as the price breaks the near-term swing high or low. Furthermore, you should not take more than 2 or 3% risk per trade.
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