What is the price channel and how is it used in trading?
Last Updated on January 19, 2021
A price channel is a powerful chart pattern that is often overlooked, as it combines several forms of technical analysis to help traders identify precise entry and exit points to trades, as well as the ability to control risk.
The strategy of trading through price channels is one of the smartest ways to succeed in Forex, and it is one of the easiest and fastest chart patterns, adding to it is very simple to learn and use.
What is the pattern of the price channel?
The price channel is an area between two parallel trend lines, namely the upper trend line which is the highest in price, and the lower trend line which is the lowest price, and the price movement exists between these two parallel lines.
Price channels provide a clear and systematic way of trading by providing the buy and sell points, when the price reaches the top of the channel sell your long position or take a short position, and when the price is in the middle of the channel do nothing if you do not have any trading, and when the price reaches the bottom Channel Cover your current short position or take a long position.
The separation of the two trendlines should be wide enough if you want to trade inside a channel pattern, if this is the case you can buy at the channel support level and sell at the channel resistance level.
However, the biggest trading opportunity comes from a price channel reversal that can result in significant price movement when reversing the trend.
Price channel trading is more effective for trading in the short term as well as for online trading in the medium term rather than in the long term. This is due to the level of volatility needed to use the channels effectively.
How to build the channel?
Preparing for a channel building requires preparing trend lines every time, and the following are the important steps that are used in forming price channels:
Find the highest and lowest level in the past and this will be the starting point for the channel.
Look for another later high as well as a later low.
Connect the two highs to draw an “upper trend” line and connect the troughs to draw another “lower trend line”.
If the two-directional lines obtained are close to parallel, a channel is formed.
Consequently, there are at least two connection points in the upper trendline and at least two connection points in the lower trendline. More connection points increase the effectiveness and reliability of the channel.
Price channels can form on all timeframes which can last for as short as an hour or for months in a row.
Price channels types
The link between the two highest levels and the lowest two levels will create one of the three patterns shown below:
- 1 An ascending channel
Usually, the ascending channel has high levels.
To build an uptrend channel, you only need to draw a parallel line at the same angle as the uptrend, then move this line to the position where it touches the peak of the last peak’s peak, this should be done at the same time you create the trend line.
- 2 A descending channel
Usually, it has a downward channel at lower levels.
To build a downtrend channel, draw a parallel line at the same angle as the downtrend line, then move this line to the position where it touches the last low, and this should be done at the same time you create the trendline.
- 3 Horizontal channel
The horizontal channel usually has horizontal height and horizontal low levels.
How to use price channels to trade effectively?
Regardless of which channel you are trading, you are always buying near the lower trend line “support line” and wait until the price is close to the upper trend line “resistance line” to take profits.
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