A price channel pattern in simple terms is when the price is running between (in a channel) support and resistance levels. When price is in a channel, it tends to stay in that channel until a channel breakout happens.

Now, there are two main kinds of price channels :

• The horizontal channel.
• The diagonal price channel.

 

This trading strategy is based on the diagonal channel pattern.

One of the most common types of strategies used by traders is breakout types of strategies. It might be due to the volatility and price movements in one direction as price breaks out of a trend line.

The traders commonly look are breakouts from horizontal supports and resistances. But breakouts from diagonal supports and resistances are also very profitable. This is because these types of breakouts are often reversal breakouts, which allows you to catch a move close to where it started.

One thing about breakouts from diagonal supports and resistances, these supports and resistances are often part of a structure. These could vary from channels, to price patterns like the wedges or triangles. And as part of structures, we often know that sooner or later, these structures will end and breakout.

The 200-EMA moves fairly slow and doesn’t hug price too much as compared with 20- EMA’s and 50 EMA’s, allowing price structures to form near it, without letting price whipsaw it. This allows us as traders to make more sense of what price wants to do.  As price gets near or touches the 200-EMA, we would already have an idea that price might bounce off the 200-EMA and start to breakout of the channel. We might see a triangle pattern forming near the 200-EMA, but it doesn’t whipsaw our moving average. Then we have an idea which way the triangle pattern is more likely to breakout to.

Let’s start on how to trade with this strategy.

Timeframes :  Any

 Instrument :  You can use this strategy for any Instruments.

 Indicators :  Diagonal breakout bounce

Long Entry :

• Trendlines should be plotted forming the price structure – Channel
• Identify the location of price in relation to the 200-EMA
• Anticipate a breakout from resistance as soon as the price starts touching the 200-EMA if price is above the 200-EMA.
• As soon as price breaks out and closes above the resistance, enter the trade with a market order

 

Stop Loss : Set Stop loss at few pips below the entry candle.

Exit : Trail the stop loss on fractals until stopped out on profit.

Short Entry :

• Trendlines should be plotted forming the price structure – Triangle
• Identify the location of price in relation to the 200-EMA
• Anticipate a breakout from support as soon as the price starts touching the 200-EMA if price is below the 200-EMA.
• As soon as price breaks out and closes below the support, enter the trade with a market order

 

Stop Loss : Set Stop loss at few pips above the entry candle.

Exit : Trail the stop loss on fractals until stopped out on profit.

Pros :

• Great tool even for price action and breakout traders.
• It not only gives us an idea with regards to the direction of price, but it also helps traders make sense of the chart.

 

Cons :

• It might bore some traders, since trades using this strategy don’t come too often. This is because some smaller structures breakout to the direction indicated by the 200-EMA even without touching it.
• The price often doesn’t get to come near it.
• In some cases, the trend has already weakened too much that when it crosses the 200-EMA, it actually is a long-term reversal of a trend.