How to Trade Forex: Trading Channels

5
Nov

Today we are following on from last week's blog on Trend lines and will be foucssing on Channels. If we take the trend line below a little further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel.

Channels are just another tool in technical analysis which can be used to determine good places to buy or sell. Both the tops and bottoms of channels represent potential areas of support and resistance.

 

To create an (ascending) channel. simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.

To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.

When prices hit the bottom trend line, this may be used as a buying area. When prices hit the upper trend line, this may be used as a selling area.

Types of Channels

There are three types of channels:

  • Ascending channel (higher highs and higher lows)
  • Decsending channel (lower highs and lower lows)
  • Horizontal channel (ranging)

Important things to remember about Channels

  • When constrcuting a channel, both trend lines must be parallel to each other
  • Generally, the bottom of channel is considered to buy zone while the top channel is considered a sell zone.
  • Like in drawing trend lines, DO NOT EVER, force the price to the channels that you draw! A channel boundary that is sloping at one angle while the corresponding, channel boundary is sloping at another is not correct and could lead to bad trades.

Trading Channels Summary:

  • There are three different types of channels; Ascending, Descending and Horizontal
  • Channels are just another tool in technical analysis and increase your probability of success but does not guarantee it
  • Always practise on a demo account first

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