Breakout Trades and the Power of Price Channels
Arwiansyah Brahim
Price channels also known as Donchian Channels are normally used to indicate the prices at which the daily has traded over a certain period. The following chart shows the prices at which the daily traded in a period of 20 days.
Thus, channels are effective in making out levels of resistance and support on a daily chart. They can also be useful to breakout traders in identifying entry levels.
This normally happens when prices break beneath support especially in a drop or over resistance during an uptrend.
In case of a breakout, it is used to mark the entry point especially since most traders expect the prices to continue with that trend for a certain period. It would be worthwhile for us to take a look at the following example of channels on a normal daily chart.
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As mentioned earlier in this passage, lower channels represent support while upper channels represent resistance - prof fx.
Trading strategies dictate that we first of all determine the way in which we should play the pair. As for the EUR/CAD pair we believe that our wish is to find opportunities to short the daily for a number of reasons. For instance, the price trend is beneath the 200 SMA and is clearly distancing itself from it. The other reason is that currently, the Euro is weakening against the CAD. And finally, the daily chart has been showing lower highs in price since February.
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Since we now know the way in which to trade this pair, it is easier for us to consider a lower frame in order to modify our entry. For the sake of this pair, I am of the view that we go with the one hour chart since we could be near an entry.
If we take anything beneath the daily or what is normally called the intra-day chart, the indicator will have to be changed to 55 periods. This is necessary because it helps to slow the indicator since we are now on a faster, lower frame chart.
For you to run the trade successfully, as it moves on, you need to follow the stop manually by simply retaining it over the higher channel line. The trade closes when price trend goes back to a level where it intersects the higher channel line together with the stop. That is just a simple but well detailed example of channels on a daily chart.