Channel Trading

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Support & Resistance Trading within the Channels

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Accolades for Todd Hanson Ph.D.

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Trading within

Support and

R

i t

Ch

l

R

i t

Ch

l

Resistance Channels

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Support and Resistance

pp

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Trading within the Support & Resistance Channels

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Trading within the Support & Resistance Channels

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Trading within the Support & Resistance Channels

When prices hit the bottom trend line

((

Support

) this may be used as a buying area.

When prices hit the upper trend line

((

Resistance

) this may be used as a selling

area.

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Support and Resistance

pp

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Trading within the Support & Resistance Channels

When the currency shifts between 2 parallel

y

p

trend lines (

Support and Resistance

) the

channel

channel is created. The first thing to do in

is created. The first thing to do in

creating a channel to depict the primary

trendline, above the highs for a downward

trend or below the bottoms for an up

trend or below the bottoms for an up trend

trend

trend or below the bottoms for an up

trend or below the bottoms for an up--trend.

trend.

Connecting at least 2 subsequent highs

draws a downward straight line. It can be

used to demonstrate profit opportunities

received during a trend.

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Trading within the Support & Resistance Channels

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Trading within the Support & Resistance Channels

A channel is effectively working in two trend lines

((

Support and Resistance

) which are depicted parallel

((

pp

)

p

to each other, the lower line acting as the support,

and the higher line as the resistance. It can be

upward downward or sideways as other trends

upward, downward or sideways, as other trends

channel. In an up

channel. In an up--channel the support line is the most

channel the support line is the most

essential trendline, in a

essential trendline, in a--down channel the resistance

down channel the resistance

li

i th

t

ti l

li

i th

t

ti l

line is the most essential.

Penetration of the

Penetration of the bottom trendline

bottom trendline ((

((

Support

pp

) shows

))

a falling currency and a potential trend reversal.

Penetration of the upper channel trendline

((

Resistance

) demonstrates the currency appreciation

((

Resistance

) demonstrates the currency appreciation.

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Trading within the Support & Resistance Channels

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Trading within the Support & Resistance Channels

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Trading within the Support & Resistance Channels

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Trading within the Support & Resistance Channels

Range

Range, or the , or the horizontal channelhorizontal channel is characterized by absence of a is characterized by absence of a strongly pronounced

strongly pronounced uptrend or downtrend trenduptrend or downtrend trend of an exchange rateof an exchange rate strongly pronounced

strongly pronounced uptrend or downtrend trenduptrend or downtrend trend of an exchange rate. of an exchange rate. As the range channel prices fluctuate in a range of the average value. As the range channel prices fluctuate in a range of the average value.

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Price Support Types

1)

1) P iP i Hi h SHi h S tt Thi fThi f ff tt hh tt 1)

1) Prior High SupportPrior High Support –– This form of support occurs when a current This form of support occurs when a current low (dip) revisits or retests a prior high/peak. Often, this support point low (dip) revisits or retests a prior high/peak. Often, this support point coincides with the 55% retracement level.

coincides with the 55% retracement level. Prior High

Low Retests Prior High Prior High

g 2)

2) Prior Low SupportPrior Low Support –– This form of support occurs when a current This form of support occurs when a current low (dip) revisits or retests a prior low. In essence, this is a 100% low (dip) revisits or retests a prior low. In essence, this is a 100% retracement of the prior rally

retracement of the prior rally retracement of the prior rally. retracement of the prior rally.

Low Retests Prior Low(s)

Buy Rule #1:

Buy Rule #1: Any trades or Grey Box Signals that occur at or near these support Any trades or Grey Box Signals that occur at or near these support points have very high odds of success

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MA Support Types

3)

3) Trending Moving Average SupportTrending Moving Average Support This form of support occursThis form of support occurs 3)

3) Trending Moving Average SupportTrending Moving Average Support –– This form of support occurs This form of support occurs when an up trending pair pulls back to or near the rising 48ma or

when an up trending pair pulls back to or near the rising 48ma or

14ma and stabilizes. Often, this support point becomes stronger after 14ma and stabilizes. Often, this support point becomes stronger after the first successful rebound off the 48ma.

the first successful rebound off the 48ma.

48ma 4)

4) Flat Moving Average SupportFlat Moving Average Support –– This form of support usually This form of support usually

occurs when there is a flat 14ma beneath the price. It is not often that occurs when there is a flat 14ma beneath the price. It is not often that

48ma Retests

a pair falling back to a flat 14ma fails to at least stall for a period of a pair falling back to a flat 14ma fails to at least stall for a period of time. The first move to a flat 14ma will usually result in some form of time. The first move to a flat 14ma will usually result in some form of rebound, if only temporarily.

rebound, if only temporarily.

B R l #2

B R l #2 AA t dt d GG BB SiSi l th tl th t tt thth MAMA tt

Flat 14ma Support Flattish 14ma

Buy Rule #2:

Buy Rule #2: Any trades or Grey Box Signals that occur at or near these MA support Any trades or Grey Box Signals that occur at or near these MA support points have very high odds of success

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Price Resistance Types

1)

1) Trending Price ResistanceTrending Price Resistance –– This form of resistance occurs when This form of resistance occurs when a current high (rally) revisits or retests a prior low/dip. Often, this

a current high (rally) revisits or retests a prior low/dip. Often, this resistance point coincides with the 55% retracement level.

resistance point coincides with the 55% retracement level. Hi h R t t P i L

High Retests Prior Low Prior Low

2)

2) Prior High ResistancePrior High Resistance –– This form of support occurs when a This form of support occurs when a

current high (rally) revisits or retests a prior high. In essence, this is a current high (rally) revisits or retests a prior high. In essence, this is a 100% retracement of the prior decline

100% retracement of the prior decline 100% retracement of the prior decline. 100% retracement of the prior decline.

High Retests Prior High(s)

Short Rule #1:

Short Rule #1: Any trades or Grey Box Signals that occur at or near theseAny trades or Grey Box Signals that occur at or near these

Short Rule #1:

Short Rule #1: Any trades or Grey Box Signals that occur at or near these Any trades or Grey Box Signals that occur at or near these resistance points have very high odds of success

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MA Resistance Types

3)

3) Trending Moving Average ResistanceTrending Moving Average Resistance –– This form of resistance This form of resistance occurs when a down trending pair rallies back to or near the declining occurs when a down trending pair rallies back to or near the declining 48ma or 14ma and stabilizes. Often, this resistance point becomes 48ma or 14ma and stabilizes. Often, this resistance point becomes

t ft th fi t f l d li ff th 48 t ft th fi t f l d li ff th 48 stronger after the first successful decline off the 48ma. stronger after the first successful decline off the 48ma.

48ma

48ma Retests

4)

4) Flat Moving Average ResistanceFlat Moving Average Resistance –– This form of resistance usually This form of resistance usually occurs when there is a flat 14ma above the price. A pair that rises to a occurs when there is a flat 14ma above the price. A pair that rises to a flat 14ma will rarely fail to experience some form of resistance. The flat 14ma will rarely fail to experience some form of resistance. The first move to a flat 14ma will usually result in some form of price lapse, first move to a flat 14ma will usually result in some form of price lapse, if only temporarily.

if only temporarily. _{Flat 14ma Resistance}

Short Rule #2:

Short Rule #2: Any trades or Grey Box Signals that occur at or near these MA Any trades or Grey Box Signals that occur at or near these MA resistance points have very high odds of success.

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Correlation in the Forex

Market

Statistically speaking, correlation is the measured relationship between two units Statistically speaking, correlation is the measured relationship between two units

i f i C l i i d f

i f i C l i i d f 1 (1 ( ff ii over a series of time. Correlation is measured on a range of

over a series of time. Correlation is measured on a range of --1 (perfect negative 1 (perfect negative correlation) to 1 (perfect positive correlation). A positive correlation implies that correlation) to 1 (perfect positive correlation). A positive correlation implies that the two units move in similar directions, the higher the correlation the closer and the two units move in similar directions, the higher the correlation the closer and more accurately these moves are. Conversely, a negative correlation represents more accurately these moves are. Conversely, a negative correlation represents

it t ith ll ( ti ) b ti

opposite movements with a smaller (more negative) number representing a opposite movements with a smaller (more negative) number representing a stronger relationship between the opposite movements.

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Range Trading

–

– Floor traders use pivot points to determine critical

Floor traders use pivot points to determine critical

price and support/resistance levels. Notice the

stops and orders are usually at 80 or 20 cents of

the whole number

–

– 80% of the market trades in ranges

80% of the market trades in ranges

g

–

– We see it work in a multitude of markets

We see it work in a multitude of markets

•• Equities

Equities

•• Equities

Equities

•• Futures

Futures

•• FOREX

FOREX

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Remember

••

You have to think it before you can act it.

Remember

–

– Trade Your PlanTrade Your Plan

••

Keep your emotions balanced! Balance is the key.

••

Find the rhythm of the market

Times

hen NOT to trade

Times

hen NOT to trade

••

Times when NOT to trade

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FULCRUMS

–

– What is a fulcrum?

What is a fulcrum?

•• the support about which a lever turns

the support about which a lever turns

•• Statistically to be points of inflexion

Statistically to be points of inflexion

•• To fine tune our trading plan

To fine tune our trading plan—

—in volatile, liquid

in volatile, liquid

instruments we add the Fulcrum grid:

–

– 00 the figure fulcrum

00 the figure fulcrum

–

– 20 cents over the big figure

20 cents over the big figure

–

– 50 half the figure fulcrum

50 half the figure fulcrum

–

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The Art of Placing Stops

3 Key Points to consider:

y

•• Let the charts dictate where to place

Let the charts dictate where to place

t

d

fit t

t

d

fit t

t

stops and profit targets

•• Ensure each trade has a superior

Ensure each trade has a superior

Risk/Reward ratio

•• Consider the charts’ time frame

Consider the charts’ time frame

•• Tailor Stops and Targets accordingly

Tailor Stops and Targets accordingly

based on the market movement.

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The Art of Placing Stops

Let the charts dictate where to place stops

•• Protective stops should be placed below Support (in Protective stops should be placed below Support (in long trades), and above Resistance (in short trades) long trades), and above Resistance (in short trades) long trades), and above Resistance (in short trades) long trades), and above Resistance (in short trades) •• Support and Resistance levels should be drawn by Support and Resistance levels should be drawn by

connecting at least two significant low and high connecting at least two significant low and high prices

prices

•• In trending market conditions, we should make every In trending market conditions, we should make every attempt to only trade in the same direction as the

attempt to only trade in the same direction as the attempt to only trade in the same direction as the attempt to only trade in the same direction as the trend