Channel Momentum Break Forex Trading Strategy

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Channel Momentum Break Forex Trading Strategy

Trading might seem like a daunting task for people who are not into trading. If you would present a naked chart to a person who has no idea how to trade, he might be staring at it blankly without any idea what it means. Some may have an idea what it might mean – time on the x-axis and price on the y-axis, but it would be just up to that level. They would find it difficult to understand that such a price chart offers an insight onto how the market has behaved in the past and how it may behave in the future.

Even for many traders, looking at a blank chart might mean nothing at all to them. Price may look like it is moving haphazardly across the screen without any sense of direction or whatsoever. However, there are ways to make sense of it all. Traders could add a few indicators to the chart, and they may start seeing how the market moves.

One of the many ways that a market moves is by moving in a trending direction. During these conditions, the market would be moving steadily in one direction. Often, seasoned traders would see the trendlines it is respecting and the channel that it has formed. However, not all traders have such a skill.

Channel Momentum Break Forex Trading Strategy helps traders identify these channels during a trending market condition. This strategy trades on trend reversals of trending market condition based on a momentum break of a channel.

Binary Options Bands

Binary Options Bands is a custom channel indicator much like the Bollinger Bands, Keltner Channel and Donchian Channel. However, this indicator resembles the Donchian Channel more closely.

This indicator is composed of three lines. The top and bottom line represents the highest high and the lowest low within a period. The lines move whenever a new high or a new low is made. The midline is plotted at the middle of the two lines and represents the median of the high and low.

Because of the nature of this indicator, it is most suited for identifying trending markets, momentum, volatility and trend reversals.

During a trending market condition, price would typically stay on one side of the channel. If the market is gaining momentum, then the outer lines would be constantly moved. Volatility could also be detected based on the expansion and the contraction of the channel. Lastly, trend reversals could also be based on the crossing over of price over the midline of the channel.

Heiken Ashi Smoothed

Heiken Ashi Smoothed is a trend-following indicator which helps traders identify reliable trend reversal signals.

Heiken Ashi Smoothed is a modified version of the Heiken Ashi Candlesticks indicator. Although the two indicators are plotted with bars and wicks, their similarities end there. The Heiken Ashi Candlesticks is printed much like the traditional candlesticks. The difference is that its body is modified as well as the color of the bars, while the wicks remain the same. The color of the Heiken Ashi Candlesticks indicates the direction of momentum.

The Heiken Ashi Smoothed indicator on the other hand is based on the Exponential Moving Average (EMA). It is plotted on the price chart oscillating smoothly across the chart based on price movement, much like an EMA would. The bars also change colors to indicate trend. This is based on the slope of the bars plotted.

The bars are blue during an uptrend and red during a downtrend.

Trading Strategy

This trading strategy trades on trend reversal signals coming from momentum crossovers of price and the midline of the Binary Options Channel.

During a trending market condition, price would be staying on one side of the channel. If it was a naked chart, price would be observed to be constantly making new highs during an uptrend or new lows during a downtrend.

The Heiken Ashi Smoothed indicator would serve as an early indication of the trend reversal. The bars would change color and stay as is for several candles.

Then, a candle should breach the midline of the Binary Options Channel. If the candle that breaches the midline closes as a momentum candle, then that would be an indication of a possible trend reversal.

Indicators:

  • binary-options-bands (default setting)
  • Heiken_Ashi_Smoothed (default setting)

Preferred Time Frames: 1-hour and 4-hour charts

Currency Pairs: major and minor pairs

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Heiken Ash Smoothed candles should change to blue.
  • Price should break above the midline of the Binary Options Channel indicator.
  • The candle should close with strong bullish momentum.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss below the Heiken Ashi Smoothed Candles.

Exit

  • Close the trade as soon as price closes below the midline of the Binary Options Channel.

Channel Momentum Break Forex Trading Strategy

Channel Momentum Break Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Heiken Ash Smoothed candles should change to red.
  • Price should break below the midline of the Binary Options Channel indicator.
  • The candle should close with strong bearish momentum.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss above the Heiken Ashi Smoothed Candles.

Exit

  • Close the trade as soon as price closes above the midline of the Binary Options Channel.

Channel Momentum Break Forex Trading Strategy 3

Channel Momentum Break Forex Trading Strategy 4

Conclusion

This trading strategy is a working trading strategy which could be used on trend reversals coming from an existing trend.

There are also trade setups that could be generated coming from breakouts of a consolidating phase. However, this usually occurs during a choppy market condition which makes trading quite unpredictable.

The key to using this strategy correctly is by using it in the right market condition. This strategy works well in markets which tend to trend. However, this strategy is not viable during ranging and choppy markets.

If done correctly, this strategy could provide trades with huge gains every now and then.

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