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Can a Trending Channel be Trusted in Forex?

Forex

Can a Trending Channel be Trusted in Forex?

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EUR/USD trending channel allows forex traders for safer trading nowadays. Or maybe not? A trending channel helps defining stop losses and profit targets while trading popular currency pairs such as Euro, Yen or Pound against the US dollar. On the other hand, if trading a forex pair inside a channel is such an easy task, why everyone doesn’t do it profitably? One reason is that most traders aren’t disciplined enough to obey to their own exit rules, but more importantly due to the probabilistic nature of trading. A trending channel is surely a fine way to trade, but always keep in mind that at some point a channel’s band will eventually give way. What are the chances a forex trader knows the odds of that happening?

EUR/USD chart: Forex trading inside a trending channel

EUR/USD chart: Forex trading inside a trending channel

In the EUR/USD forex chart above it is clear that the most popular currency pair is trending inside a well defined channel. Everyone can easily pinpoint 4 verification points both for support and resistance levels of that particular channel. According to technical analysis a level’s importance increases as the verification points increase. For example the same trending channel the Euro has entered is much more important now than if we were talking about it in June. However that doesn’t mean Euro will keep declining indefinitely and even more so inside that specific trending channel. The chances though to break above the resistance level or below the support level are less than in June. So it is considered safer to trade inside the channel given the number of verifications.

 

What happens when such a channel collapses? The breakout will be quite important considering the significance of the trending channel. The thought process about trusting a support or resistance level is the same with the process about breakouts. Verification equals significance and that equals trust. So, when a breakout occurs in EUR/USD over the next weeks or months, serious forex traders will immediately trade out if they hold a position or enter a new in the direction of a breakout. Until then forex trading on EUR/USD is much more convenient to be done inside the channel, close to the peaks and to the valleys and try to avoid buying or short selling in the middle of the channel.

Jim entered the financial world by trading sports and now invests in US stock markets and forex, trying to buy low and sell high. Connect with Jim: StockTwits | TradingView