There are numerous opportunities for creating profitable swing trading strategies in the forex market. Although many swing traders focus on anticipating the breakout after a period of consolidation, channel trading is arguably one of the simplest swing strategies to implement. When a currency pair trades within a defined price channel, whether bullish, bearish or trendless, the consistent oscillation of price between support and resistance levels offers multiple opportunities within a relatively short period.
To take advantage of this swing trading strategy in the forex market, first look for currency pairs trading within a channel. A price channel is defined by drawing trendlines between two or more swing highs and swing lows. On a bearish chart, this means price oscillates between lower highs and lower lows, forming a downward sloping channel. On a bullish chart, the opposite is true. If a currency pair exhibits no clear trend and price moves between two horizontal lines of support and resistance, it is said to be range-bound. Once the channel is identified, implementing this swing trading strategy is as simple as going long when price touches the support level and selling long positions or entering short positions when it touches resistance.
For example, assume the USD/EUR currency pair levels out after an uptrend and trades sideways for a period of weeks. After three similar swing highs and lows, price establishes a channel between 1.51 and 1.60. As price approaches the lower channel boundary at 1.51, enter using a market order or a limit order set at this support level. A stop loss set below support can help protect your investment from an unexpected breakout. As price swings back up through the channel, prepare to exit your long position with a limit order set at the 1.60 resistance level. A short position can also be entered at this point in preparation for the downswing. Set stop-loss orders just above resistance.