Like any other channel you have ever heard of, technical channels are two parallel lines drawn opposite each other.
If you draw an upper trend line and a down trend line at the same time on a trend, you have made a channel.
Price moves up and down the channel as it paves its way either in an upward direction or sideways or downward direction. It moves in a zig-zag motion marking levels of support and resistance.
Channels are also used in technical analysis like supports and resistance and trend lines. They can also be used to identify the direction of the entire trend and at the same time are used to identify potential areas of trade entries for both buy signal and sell signal.
So how to draw channels, it is very simple. Like we have done for trend lines, use the same process to draw but remember this time we have to draw them on both sides.
Just draw below and above the price trend movement.
The two lines of the channel act as support and resistance levels and tend to hold prices just with in the channel till it breaks on either sides showing a change in the direction of the trend.
Sell when the price confirms below the bottom line of the channel and buy when it confirms above the upper line of the channel. We will look at that in detail as we go on!
Types of channels
We have mainly three types;
This is drawn when price is moving in the upward direction. It is used to identify an uptrend. A break on an a lower line of the channel may lead to a change in the direction of the trend to the down side. When this happens, it gives a strong signal for a sell.
A descending channel is drawn when price is trending on a down side . It helps to show the direction of the trend and can be used to identify trade signals. A break on the upper side of the channel gives a signal for a change in the direction of the trend. When this happens, buy the pair.
A horizontal channel shows price moving in the side ways direction. At this point price is ranging or is in a congestion. A break on the upper side of the channel indicates change in the trend direction to the upper side, therefore a probable uptrend while a break on the down side of the channel signals a probable downtrend.
A horizontal channel can also be traded by looking at price retracements/reversals on the upper line of the channel,resistance and the lower line of the channel, support. Here you buy on support and sell on resistance as indicated on the chart below as sell 1 and buy 1.
Below is a picture on how a horizontal channel looks like on candlestick chart;
Very important to note when trading on channel
Price swings up and down within the channel until it gets closer to the either side of the channel line. When it finally breaks the upper line, it becomes the new support and when it breaks below the lower line, it becomes the new resistance.
As price paves between the channel marking levels of support and resistance, you can take advantage of it by selling on reversal at the upper line of the channel and buy on the bounce of the lower line of the channel.
Your stop levels should be set a few pips below your entry for a buy or above for a sell and your first take profit target should be equal to the distance between the two lines of the channel. You can always make some adjustments depending on the price volatility in the market.
Short notes on channels
- A channel can be traded as a break out or reversal.
- Trading a break out on the channel is the same way we do for support and resistance and trend lines.
- You can enter a trade immediately on the confirmation of the breaking candlestick (aggressive trader) or wait for a retest after the break and enter a trade on the second confirmation(conservative trader).
- A steep channel i.e less reliable compared to the horizontal one.
- The more attempts price take to break the channel, the stronger and more valid it becomes.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...