Profound truths are often rather simple truths. In terms of trading the FX market, there is a ton of different ways to find a nice trade to enter and subsequently to decide when to exit a trade.
There are however, only a few ways that traders end up doing themselves harm. Second, you could say that many traders try to pick the top or bottom of a move before evidence proves this to be a prudent trade. Price Channels are a simple tool to show you the overall direction a price is heading for a specific duration of your choosing. The often seen occurrence is that the turn is rare and most corrections can be weathered with low-enough leverage without hurting your account.
Overtime, this method of following the overall trend as soon-to-be-identified by the channel can outperform in-and-out trading often performed by traders thinking they can guess when the market will turn. However there are multiple channels and one specific channel type will be used today, the Regression Channel. We will walk through the differences of a regression channel and other price channels and how they can be used. Regression Channels are a Default Offering on Marketscope.
Regression channels provide you a median line followed by evenly spaced or parallel lines above and below that can act as support and resistance.
The channel height will be dependent on the highest or lowest close away from the median line over the given time frame of your choosing. The median line is based on simple linear regression based on closing prices. Linear regression is an algebraic formula to help you find the median set of data over a given time and turn that median set into a line that can be extrapolated forward for trading.
While that last sentence may have given you a headache, the regression line is drawn for you when you pick an appropriate high and low and a channel around the line will help provide you with a trading bias going forward.
Regression Line Provides Directional Bias between two extremes. Once the regression channel is selected, you need to select the high and low over the current period for the regression channel to be drawn. You can see above that the channel is drawn off the most extreme close higher or lower away from the linear regression line.
The channel does not have to be redrawn as the lines are set to extend forward. The main point of regression channels is to trade in the direction of the linear regression line. Because we always care about trading with a good risk: When deciding when to take profit, the most common approach is with the regression line. Lastly, if you like the concept of regression channel trading but want more action you can draw channels within channels.
By drawing channels within channels, you can see when small corrections within the overall trend have expired and the overall trend and minor trend are now moving in the same direction.
Either way, you can put a stop below the recent swing low or high for a downtrend once you see a closing break out of the corrective channel. To be added to Tyler's e-mail distribution list, please click here. Tyler is available on Twitter ForexYell. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Foundations of Technical Analysis: Classic Chart Patterns, Part I. The Importance and Calculation of Transaction Costs.
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