Flat channel and “breakout” strategies
January 13th, 2009 | by admin |Arbitral operations in the international currency market open considerable possibilities for receiving of high profit; however, in turn, they are quite risky. Margin trading is the riskiest one.
Leverage, which allows to increase working actives of the investor in ten times, is quite dangerous, because you can lose a considerable part of your capital. Therefore, rather serious demands, concerning macroeconomic, highly specialized and psychological training, are made to qualification of market participants for successful trade in FOREX market. It is realized in creation of tactical plans of carrying out of operations. Planning is made by each market participant individually on the basis of tried-and-true trading strategies. Trading strategy is a set of actions undertaken by the trader for receiving of maximum profit for the certain period of time or minimization of possible losses. In general, trading strategy can be described as a combination of tactical methods applied depending on situation in the market. Basic trading strategies have been developed and applied in the share market for the first time, before creation of the FOREX market. During formation and development of FOREX they have continued to develop, too. In addition to use in share and currency market trading strategies are also used in the commodity markets, markets of precious metals and so forth.
For description of trading strategies we will use the following average data deduced by experts, which are valid for basic currency pairs - USD/DEM, USD/JPY, USD/CHF, GBP/USD:
- up to 50 basis points - short-term flat;
- 50-150 basis points - short-term trend;
- 200-500 basis points - medium-term trend;
- 500-1200 basis points - long-term trend;
Flat channel strategy
Flat channel strategy is a trade upwards and downwards from resistance and support levels: their lines are borders of channel. This tactics works well in flats and is almost absolutely not suitable for ascending or descending trends. Schematically flat channel strategy can be represented as follows: (pic. 1.1):
The rule of opening a position can be formulated as follows:
Define support and resistance levels. Correct calculation will help to receive channel borders, where the market movement occurs.
When the price reaches one of borders and the price line rebounds in opposite direction, it is necessary to open position on buy, if rebound was from the support level, and, on the contrary, on sale, if the prices have reached the resistance level.
When the price reaches the opposite border, the position will be closed. It is necessary to note that the price can be reversed before the price line achieves borders of the channel, so positions can be closed before achievement of support or resistance levels.
Advantage of such strategy is a possibility to maximize profit by opening and closing positions several times in case of continuation of flat. The basic shortcoming is that the breakout of lines of the channel can lead to considerable and unjustified losses.
In order to prevent these losses competent arrangement of stop-loss protective levels is needed, when unprofitable positions would be closed in case if the market movement went in opposite direction from the planned one (pic. 1.2).
If there is a confidence in continuation of the market movement, the position can be “turned over” at the stop-loss level.
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