Trend Channel Indicator – How to use it in Forex

News | February 17, 2020, 10:17 AM | Brought to you by a Guest author

The trend is your friend. This old saying in trading amplifies the importance of identifying trends and using them in trading. One of the best ways to identify trends are channels. are powerful market patterns for technical analysis. Besides, identifying the market trend, they provide ideal entry and exit points. To trade the channel pattern properly, you need a good indicator. This is where the trend channel indicator comes in handy.

Trend channel (shi channel) indicator is one of the best tools for technical analysis. It follows price action for potential entry points. Here is an important point. You need to use the trend channel indicator optimally. A platform that is backed by fast servers run indicators and execute trades quickly and easily.

Understanding the Trend Channel Indicator

Markets tend to respect channels. In other words, the direction of the channel shows the actual market trend. This means that channel indicators provide a framework for understanding the market trajectory. In addition, you can use the trend channel indicator to predict retracements and pullbacks.

Using the indicator is pretty much straightforward. This means any trader regardless of their trading levels, can use these indicators. Moreover, you can use it in any time frame and currency pair.

Channel Indicator Levels

The trend channel consists of two levels divided by a median line. The Upper channel is the dynamic resistance channel, while the lower channel is the dynamic support level. Depending on the market behaviour, the middle line can act as a resistance or support point. If the price maintains its position in the upper cable, then the bullish trend might continue. Similarly, the bear trend will continue if the price holds its position below the mid-channel.

The upper and lower lines resistance and support lines function like typical trend lines. The upper channel creates an excellent opportunity to go short while the lower channel is a perfect long entry. However, channels show the market’s shape and hence much better than trendlines.

Besides showing the market trend, the indicator can also help to predict market continuation. Simply put, the trend is strong if the market stays within a channel for a substantial period without breaking out. If the market breaks out of the channel, it is an indication of changing market sentiment. However, you should be careful of false breakouts. In these cases, the market breaks out of the channel and then moves back into the channel.

Types Of Channels

A channel requires a minimum of two lows and two highs. Connecting two peaks and troughs with lines results in any of the three channels; ascending, descending, and horizontal. Ascending channels are formed when the channels are angled up while the channels facing downwards from deciding channels. Both ascending and descending channels are called trend channel. Horizontal trends are referred to as rectangles or trading ranges.

Why Trend Channel Indicator is Important

Channel indicators for MT4 offer a classic strategy for trading channels. There are various types of channels, including Donchian, Fibonacci and equidistant channels. However, the three-line channel is considered the most versatile and also the most tricky.

Another benefit of the trend channel indicator is convenience. You can easily plot the channel on the chart automatically. Also, it came with two channels which provide a better view of the market than one channel. Now we will cover how one can trade with channel indicators, please note this is not investment advice.

How To Trade Trend Channel Indicator

The first step is to consider whether the market is trending upwards within the bigger indicator channel. The next step is to look out for a retracement in the market.

Trading Strategy

The trading strategy in regards to channel indicators varies significantly. However, they are all based on the same idea. The top line acts as the dynamic resistance level, while the bottom channel line is considered the dynamic support level. Once the price hits the resistance or support level, it bounces back into the channel. A stop loss is placed several pips above the resistance or a few pips below the support level.

When trading the channel, you should pay attention to the candle formation at the entry point. If the breakout candle forms above the channel, then the set up is invalidated. However, if the candle closes within the channel with the body inside the channel, it might be a good entry point. The middle line also plays a significant role in trading channels. If the trend breaks the middle line, the market could be reversing altogether. The middle line is also a suitable point for trailing profit.

Buy Strategy

Wait until the price bounces from the lower channel. A strong bullish candle is a good signal for opening a position. In such a situation, you might want to place your stop loss below the lower channel level and your take profit in the upper channel area. The upper channel could be an excellent area for taking profits and where you could find potential pullbacks.

Sell Strategy

  • Ensure the price bounces from the higher channel downwards
  • A solid bearish candle signals a downward movement.
  • You might open a short position if the price breaks below the mid-channel with a stop loss above the upper channel
  • Set your price as the price approach the lower channel

Breakout

The market will not respect the channels all the time. In some cases, the market may break outside this channel. A multi-frame analysis can help you determine whether the market is trading within the channel. Once the market moves outside the channel, it creates an excellent opportunity for trading breakout.  However, you should look out for confirmation that the market has formed a legitimate breakout. For instance, you can wait for the market to retest the breakout line. If you do not want to trade breakouts, the price movement outside the channel serves as a telltale sign of the ending trend.

Final Word

Trend channel indicator is one of the most powerful trading tools. They help identify the market trend and establish ideal entry and exit points. In a nutshell, you should consider incorporating this indicator in your strategy. This article will help you get started.

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