Forex trading strategy #9 (Trend line tunnel)

Thierry

i was there a setting for the ADX i should set it for.

thanks, mike f

pls i want to know what is the best strategy to use in trading.my email address is degod03[at]yahoo.com

Hi uzo,

Spotting channel formations and drawing channel lines is mostly done visually, which means when you look at charts you simply see a price pattern in a form of a channel.

However, there is a rule that can help traders to identify a newly formed channel pattern. It goes as follows:

If the price makes new highs or new lows as the time goes, the market is in a steady trend. Once price STOPS making new lows (when in a down trend) or new highs (when in an uptrend) traders have got a first signal that a possible channel formation is under way =>

A failure for price to make a new high or low in a trending market means buyers' or sellers' power is getting weaker. This alerts an opposite force - (if buyers, for example, were pushing price forward successfully and than on a new attempt failed to send price for a new top, sellers immediately get the "message" and use the opportunity to pull price down.

Now, let's take an uptrend as our reference:
So, once buyers failed to make a new high - a price swing high that exceeds previous swing high - then we have a first alert in place and start watching sellers reaction as they pull price down.
If sellers succede in making a new swing low - a low that will be lower than a previous swing low on the price chart - then we will have a trend reversal and a beginning of a new downtrend. However, in case of sellers' failure, the price will be stuck in no trend situation, e.g. no new high was made, no successful low was made - we've got a valid tunnel formation, which price now will try to break out of.

Regards,
Edward

Hi Edward,

So what role do pivot points play in this strategy? If the observed tunnel is the same range as a pivot point tunnel, does it make it invalid? Also if the breakout is near a pivot point, is it advisable to wait until a candle breaks the pivot point as well?

I have been trying a similar strategy to this but setting my range to the asian market time frame (7pm - 4am EST) then setting a buy/sell limit 10 pips beyond the range of that time. It has been a fairly successful strategy but pivot points sometime burns me.

thanks,
Jason

Hi Jason,

If price tunnel is formed within the two Pivot levels, it keeps the tunnel valid and makes the breakout even stronger.

It is always beneficial to know where Pivots on the chart are; and, as you said, it would be absolutely logical to wait till price breaks pivot support/resistance line if the last one happen to be close to boundaries of an established price tunnel.

How pivot points can improve our trading with tunnel breakout method?
Primarily, Pivots help to identify initial profit targets once price broke out of the tunnel. You simply set your profit target 4-5 pips earlier (to make sure it gets reached) than the closes pivot level and have your breakout trades win day after day.

Also, during early trading hours traders may filter out breakouts they want to trade:
before even London session open (and during London session as well), price tunnels which formed above the daily Pivot point would shift biases to taking Long trades only, while tunnels formed below the Pivot point level would advice reacting only to breakouts with an opportunity to trade Short.

Regards,
Edward

Hi Edward.
Great place.
Could you give me some tips for prevents false breakouts? Tks

Once you've spotted a channel, notice, how many times the channel borders had been tested. They should be tested at least twice - this is a good sign that a breakout is underway.
Then you can use to your advantage the knowledge of trading divergences.
Stochastic, RSI or MACD would do a good job. (you can learn about divergence trading here: http://forex-strategies-revealed.com/trading-system-divergence

Your goal would be to spot a clear divergence setup while price still trades inside the channel. Based on this knowledge, you'll be able to anticipate a direction of a breakout (it is especially good if divergence signals agree with the main trend), as well as plan earlier entries on the first retracements.

Regards,
Edward

Hi Edward,

thank you very much for this great site. I would like add to this method and trading in general the following:

1. Look for inside bars.

The breakout is almost meaningless or too risky, if you bought an inside bar. The Market tend to trade outside but closes finally very often inside the Range. Ergo: Wait for the close!

2. Look for more breakoutpoints near the same level on higher timeframes.

If the breakout level is near on other "Hot-Spots" (Fibo., Pivot, Hi.Lo., Supp.-Res.) then the point should be more reliable. And very Important too: Take these points also as resistance for your target, if it has to reach more than that level.

2.1. Look for accelerators on the desired way. These may be the Points, i´ve mentioned in 2.

You can rate these points on a scale from 1-3, where 1. is very strong, but profitable too and could give a great acceleraton to reach the next point.

Try to make statistics an do your OWN math for your market. Only then you are able to say how the market reacts in the case of this method (pullbackrate, size, strenght etc.). With your OWN data you can feed your self-assurance.

3. Look for the best circumstances.

Try to figure out:

- the best time to trade (activity)
- the best risk/reward level
(the more you are trying to get out of the market, the less the size of your position should be)
+ Create a "good feeling" money- and riskmanagement

4. Strategy is the last, that makes you profitable.
Good feeling MM and RM and a stable personality is the only key.
The strategy should be so easy that you could tell "everybody" to trade for you.
In other words: Don`t trade on strategies you and everybody else don`t understand!

5. Good feeling
I wrote it above. You can never know before, which is the best MM, trading-method etc. But you are able to say what feels good. And when something is feeling good you are more able to reharse it and stick to your neccesary tradingplan.

PS: Only the wise traders know the real value of the k.i.s.s principle.
PPS: I try to reflect with my own words something very important that somone wrote in his book:

Trading will be so easy for you as it seemed to you at the first time -

after a lot of despair, deprivation, stress, grief, anxiety...

PPS: This post stands for all the strategies that are confirming: "Occam's razor" (look at wiki if you don`t know how occam was)

Best regards

Albert