Forex Swing Trading: Capturing Profits In The Canadian Market

Forex Swing Trading: Capturing Profits In The Canadian Market – Widely known for their ability to capture volatility and capture price action, Bollinger Bands have long been a favorite of Forex traders. However, there are other technical options that traders in currency markets can implement to capture profitable opportunities in swing action.

Lesser known band indicators such as Donchian channels, Keltner channels, and Stark bands are all used to isolate such opportunities. Also used in the futures and options markets, these technical indicators have a lot to offer given the vast liquidity and technical nature of the FX forum.

Forex Swing Trading: Capturing Profits In The Canadian Market

Forex Swing Trading: Capturing Profits In The Canadian Market

Different in underlying calculations and interpretations, each study is unique because it highlights different components of price action. Here we explain how Donchian channels, Keltner channels, and Stark bands work and how traders can use them to their advantage in the FX market.

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Donchian channels are price channel studies that are available on most charting packages and can be profitably applied by both novice and expert traders. Although the application was mostly designed for the commodity futures market, these channels can also be widely used in the FX market to capture short-term bursts or long-term trends.

Created by Richard Donchian, considered the father of successful trend-forecasting, the study involves currency fluctuations and aims to place profitable entries at the start of a new trend through lower or upper band penetration. Based on the 20-period moving average (and thus sometimes referred to as the moving average indicator), the application also establishes bands that plot the highest and lowest levels. As a result, the following symptoms arise:

The theory behind the signals may seem a bit confusing at first, as most traders assume that a break of the upper or lower range signals a reversal, but it’s actually quite simple. If the current price is able to cross the high of the action range (provided sufficient momentum exists), a new high will be established as an uptrend is imminent. Conversely, if the price action could crash below the range, a new downtrend could be in the works. Let’s look at a prime example of how this theory works in the FX markets.

In Figure 1, we look at the short, one-hour time-framed EUR/U.S. Dollar currency pair (EUR/USD) chart. We can see that, prior to December 8th, the price action consisted of a tight consolidation within the parameters of the bands. Then, at 2 a.m. on December 8, the euro price makes a run on the session and closes above the band at point A. This is a signal for the trader to enter a long position and exit short positions in the market. If entered correctly, the trader will receive around 100 pips in short intraday bursts.

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Another great channel study that is used by all types of traders in multiple markets is the Keltner channel. Application to Chester W. was introduced by Keltner (in his 1960 book

) and later the famous futures trader Linda B. Edited by Raschke. Raschke modified the application to take into account the average true range (ATR) calculation over 10 periods. ATR measures volatility or how wide the price movement is for a commodity or currency over a specified period.

As a result, the volatility-based technical indicator bears many similarities to Bollinger Bands®. The difference between the two studies is that Keltner’s channels represent volatility using high and low prices, while Bollinger’s studies rely on standard deviation. Nevertheless, the two studies share similar interpretations and trading signals in currency markets.

Forex Swing Trading: Capturing Profits In The Canadian Market

Like Bollinger Bands®, Keltner channel signals are generated when price action breaks above or below the channel band. Here, however, as price action breaks above or below the upper or lower barriers, a continuation is supported on a retracement behind the median or inverse barrier.

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Figure 2: Three profitable opportunities presented to the trader by Keltner. Image by Sabrina Jiang © 2021

Applying the Keltner study to the daily charted British Pound/Japanese Yen currency cross pair (GBP/JPY), we can see that the price action breaks above the upper barrier, signaling the trader to initiate long positions. is By placing effective entries, the FX trader will have the opportunity to effectively capture maximum profitable swings and at the same time, exit efficiently, maximizing profits.

Similar to the Bollinger Bands® technical indicator, STARC (or Stoller Average Range Channels) bands are calculated to incorporate market volatility. Developed by Manning Stoller in the 1980s, bands will contract and expand based on fluctuations in part of the average true range. The main difference between the two interpretations is that STARC bands help determine high potential trades rather than price action standard deviations. Simply put, bands will allow the trader to consider higher or lower risk opportunities rather than returns to the mean.

This does not mean that the price action will not go against the newly initiated position. However, STARC bands work in the trader’s favor by showing better opportunities. If this indicator is combined with disciplined money management, the FX enthusiast will be able to profit by taking low-risk initiatives and minimizing losses. Come New Zealand Dollar/U.S. Let’s take a look at an opportunity in Dollar (NZD/USD) currency pair.

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Figure 3: NZD/USD presents a greater risk to reward through this STARC bands example. Image by Sabrina Jiang © 2021

New Zealand dollar/U.S. The dollar currency pair presented in Figure 3, we see that the price action is picking up sharply during November, and the currency pair seems poised for a retracement of sorts. Here, the trader can apply the STARC indicator as well as the price oscillator (stochastic, in this case) to confirm the trade.

After overlaying the STARC bands, the trader can see a low-risk selling opportunity when we reach the upper band at point A. While waiting for the close of the second candle in a textbook evening star formation, one can take advantage by placing an entry below. End of session.

Forex Swing Trading: Capturing Profits In The Canadian Market

Confirming the downside cross in the Stochastic Oscillator, Point X, the trader will be able to profit around 150 pips in the day’s session as the currency falls from 0.7150 to an even 0.7000. Note that the price action touches the lower band at that point, indicating a low-risk buying opportunity or a potential reversal in the short-term trend.

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Now that we have examined trading opportunities using channel-based technical indicators, it is time to take a detailed look at two more examples and explain how to capture such gains.

In Figure 4, we see a nice short-term opportunity in the British Pound/Swiss Franc (GBP/CHF) currency cross pair. We will put the Donchian Technical Indicator to work and go through the process step by step.

Figure 4: Applying the Donchian channel study, we see very profitable opportunities in the short-term of the hourly chart. Image by Sabrina Jiang © 2021

1. Apply the Donchian channel study to price action. Once the indicator is implemented, opportunities should be clearly visible, as you are trying to isolate periods where price action breaks above or below the study bands.

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2. Wait for the session to close which is potentially above or below the band. A close is needed for the setup because the pending action may very well fall back within the parameters of the band, ultimately voiding the trade.

3. Position the entry slightly above or below the closure. Once the momentum takes over, the directional bias should push the price forward from the close.

4. Always use stop management. Once an entry has been executed, a stop-loss order should always be considered as it can limit losses to a predetermined amount.

Forex Swing Trading: Capturing Profits In The Canadian Market

Applying the Donchian study in Figure 4, we see that there are several profitable opportunities in the short term.

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Once you are in the market, you can either exit your short position on the first step or hold the sell. Ideally, the position will be positioned to maintain a reasonable risk to reward ratio. However, in case the position is closed, you can consider a re-start at point B. Finally, the trade will profit more than 120 pips, justifying the higher stop.

It’s not just Doncians that are used to capture profitable opportunities—Keltner applications can be used as well. Taking a step-by-step approach, let’s define the Keltner opportunity:

1. Overlay the Keltner Channel indicator on the price action. As with the Donchian example, opportunities should be clearly visible, such as whether you are looking for penetration of the upper or lower bands.

4. Money management is implemented by placing a stop just below the session low or session high price.

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In Figure 5, we plot the British Pound/U.S. We see a very profitable opportunity in Dollar (GBP/USD) major currency pair on daily timeframe. Having already tested the upper barrier twice in recent weeks, the trader could see a third attempt as price action at Point A on July 27 increases.

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