Covering Unique Situations: A Downward 3 Point-Channel Setup

Covering Unique Situations: A Downward 3 Point-Channel Setup

Submitted by adil on Tue, 03/11/2014 - 06:58

Technical tools enable a trader to read some recurring and obvious patterns in price action. This goes a long way in helping a trader to earn maximum possible returns with least risks involved. When these patterns and situations occur, the trader must have experiential background and knowledge to adapt to that situation and employ ways to make gains from the price movements.

A 3-channel setup utilizes situations involving trends and patterns, to predict tradable and profitable positions. Essentially, this strategy involves looking out for a long downward price trend which is complemented with lower lows, or stronger support level and a strong breakout.

When there is a long drawn downward trend, the trader should construct downward sloping trend line. The highs of the trend should be joined together. Where the trend ends, the price should break above this trend line, to rise as the first peak. The trader should wait for a second higher peak to occur, at which point the trader should construct a rising trend line. The trader should then construct another trend line parallel to the second trend line, starting from the first lowest low and then joining other lower lows of the price action.

This highlights the area where the price is most likely to move, that is the area between the parallel lines. The picture below shows how this strategy is set up.

The green line is the first downward slopping trend line which culminates at the point where price breaks out. Points 1 is the first highest high of the breakout, whereas point 3 is the second highest high. These points are used to construct second trend line. Point 2 is the first lowest low of the breakout, on which a third trend line is drawn. The area arising between these parallel lines or the channel represents possible positions for binary options trading opportunities. That is why this approach is called a 3 point channel strategy.

Traders can use this channel to enter call trades or Touch/ No Touch trades. Setting up call trades is simple. Whenever the price touches the lower trend line in the channel, the trader should enter a Call binary option trade, choosing appropriate expiry time and bet on the price to go up. This is definitely the most logical way of using 3 point channel approach.

Setting up touch trades also becomes simple with a 3 point-channel. The upper and lower trend lines of the channels represent the most possible points where the price may touch. The trader can enter price range that lies within the channel to achieve a successful touch trade. Alternatively, the trader can also use the 3-point channel approach to enter in to no touch trades. For this purpose the price points lying outside the channel should be choses, particularly the one above the upper line. That is because the lower line of the 3-point channel, is actually a strong support for a rising trend which is unlikely to falter.