by TFK6: To trade this forex strategy, you need to clean your chart of all indicators. Open your favorite chart in your most favorite currency pair. Sit back and relax, let the creative part of your brain to the work. This strategy is simply artistic. It can procure beautiful trades and it is quite similar to some strategies from George Soros arsenal.
The strategy identifies the trend, its end (by breakout). But it doesnt enter the trade immediately on breakout. It goes one step ahead, to ensure that what we see int he markets is really happening. Not only it waits for correction, it also waits for correction confirmation. If you are one of those people that enjoy planning your next moves couple of steps ahead Iam sure you will enjoy this type of trading very much !
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Let's look at the forex strategy rules
First of all tunnel needs to be identified. We identify a tunnel by connecting at least two tops and two bottoms of price moving almost horizontally in the price belt. Tunnel might be sloping a little bit, it can get wider or more narrow. Those are small nuances of the price development that takes time and practice to recognize. To achieve 90 percent of results, you need to focus on the basics.
You draw a tunnel, connecting peaks to create a resistance, connecting bottoms to create a support. Breakout of either of those zones will be a primary signal of either a long or short trade.
Sell trade
Horizontal support (bottom zone) is broken. Breakout candle is wide and closing near its low (bottom wick is narrow).
Once the candle closes, we focus our attention on correction that will occur in most of the cases. Correction will test previously broken support by upward swing, in,most of the cases touching the support and respecting it as a new resistance.
We will be looking for a new high to breach created below the support.
This is the signal confirmation. We place pending sell order on the low price reached by the breakout. Stop loss is placed tightly above the correction high. It is possible that price will move slightly higher creating the new higher high. And that is OK. Signal remains valid until the price closes above the previously broken support. In that case we adjust the stop loss to fit new (still valid high).
Take profit: We consider the tunnel in bigger picture. We hold the position for as long as possible because price will move substantially in most of the cases. At very least, go for the half of the vertical length of a tunnel.
Buy trade
Horizontal resistance (upper zone) is broken. Breakout candle is wide and closing near its high (upper wick is narrow).
Once the candle closes, we focus our attention on correction that will occur in most of the cases. Correction will test previously broken resistance by downward swing, in,most of the cases touching the resistance and respecting it as a new support.
We will be looking for a new low to be created above the resistance.
This is the signal confirmation. We place pending buy order on high reached by the breakout. Stop loss is placed tightly below the correction low. It is possible that price will move slightly lower creating the new lower low. And that is OK. Signal remains valid until the price closes below the previously broken resistance.
Take profit: We consider the tunnel in bigger picture. We hold the position for as long as possible because price will move substantially in most of the cases. At very least, go for the half of the vertical length of a tunnel.
Notes: No two tunnel breakouts will ever be the same. Nothing will fit perfectly. Do not focus on perfection, focus on bigger picture and the fundamental soundness of the move. It is possible to bend the rules a little bit. Mastering the art of drawing trendlines means to find the common traits that are good enough for us to be confident in our analysis. Even though, that will be some trades that will move against you. Even though this strategy works very well it is not a holy grail. Losses are costs for doing this business.
