As has been described in a previous article, channels are formed when trend lines that are parallel to each other are used to connect the highs and lows of the price action on any asset. Channels can be rising, falling or sideways in orientation. Unlike the other channel strategy which described a breakout, this strategy shows how to trade the channel while the price is still contained within its boundaries. The orientation of the channel will determine the direction of the trade. Rising channels follow an uptrend, and to trade with the trend, it is best to use this for a BUY/CALL setup. Falling channels follow a downtrend, so the best way to trade within the channel is to use a SELL/PUT option, which tracks the movement of the trend.
Rising Channel BUY Strategy
An uptrend is characterized by the formation of higher highs and higher lows. Parallel trend lines which border the price action will therefore form a rising channel. The number one rule of the thumb is to trade with the trend until the trend comes to an end. Therefore, the trade is to be initiated at the lower trend line where the price action is expected to take a bounce. The key is to ensure that the price will bounce off the lower trend line and not break through it (as shown in the previous channel strategy).
How is this recognized? The candle in question must close above the lower trend line, irrespective of whether the candle low has extended below the lower trend line or not. This is the only condition that tells the trader that the candle has not broken below the lower trend line in the channel. Therefore the trade here is to allow the candle to close above the lower trend line, then initiate a BUY trade (on NADEX or Cantor Exchange) or to initiate a CALL trade on a European binary options broker. Most of the trades performed with this strategy will work best on a 1-hour or 4-hour time frame.
The trade at the lower trend line
Simply use the channel tool to identify a rising channel. The lines of the channel must touch at least three areas of price highs and three areas of price lows.
Once the channel has been traced, look for a time when the price action will touch the lower trend line without breaking below it. Allow the candle to close, and then set the CALL trade on the open of the next candle. You should allow at least two or three candles to elapse for the trade to expire. Therefore, if you perform the analysis of the trade on a 1-hour chart, your minimum expiry time should be two to three hours on your binary options platform. If you use a Digital Option selection on a trading platform such as Magnum Options, select the expiry time that coincides with this. If you use the OptionBuilder, set the expiry time according to the hour-minute time on the clock.
Take a look at the snapshot here. We have points 1, 2, 3 which represent the 3 areas where the lower trend line was able to connect the price lows. The lines are extended into the future so that when price action hits the lower trend line without breaking it, you can set up a trade (points A, B, C and D). Any of these points would have served as good areas for CALL trade entry. The beauty of the channel is that it can setup multiple trade entry areas before the setup breaks down.
Falling Channel SELL Strategy
A falling channel forms in a downtrend, which is a situation when the price action has lower lows and lower highs. The falling channel is formed when two parallel trend lines border the highs and lows of the price action.
In order to trade the falling channel, the trader must set a PUT trade at the open of a candle which follows another candle that has touched the upper trend line without closing above it. This setup is shown in the trade example below.
The trade at the upper trend line
The trade here is to set a PUT trade when the price is at the upper trend line. To do this, allow the price action candle to touch the upper trend line, and close below it, confirming that there is no break. If you look down the snapshot , where “No Trade” is written, you will see that this rule was negated and therefore no PUT trade can be setup there. However, at areas marked A, B and C, a PUT trade can be setup because these are areas where price action is taking off from the upper trend line downwards, as breakout situations did not occur.
Once again, this trade will work well on a 1-hour or 4-hour chart, and can be used to make trade entries repeatedly until the channel setup breaks down.
If practiced properly, this strategy represents a very easy way to make money from European-style binary options. Practice this on demo before you go live. You can open a free demo account on CToption (they also accept US clients).