PRICE CHANNELS: A simple but very important trading tool

14 sept. 2022

1. WHAT IS A PRICE CHANNEL?

On any chart, you can see that the price is moving in a trading range bounded from above and below, and this range is a price channel. They can be ascending, descending or sideways (ranges). Ascending channels are formed with an uptrend, Descending channels are formed with a downtrend, Lateral channels are formed at intervals when the price moves in a horizontal range.

2. WHICH CHANNELS ARE MORE RELIABLE AND EFFICIENT?

If the price has touched the channel boundaries more than two or three times, it is considered confirmed. If he touched it up to two or three times, the channel is unconfirmed and weak.
In fact, the channel is a derivative of the trend line. The channel boundaries are drawn based on the upper and lower maximum price values (extremes).
To create a connecting price channel, both lines must be parallel, and the number of points must not be less than indicated above. The more often the price touches the channel boundaries, the stronger and more effective the channel will be.

3. WHAT TO DO WITH THE PRICE CHANNEL? HOW TO TRADE IN IT?

• Use the bottom line of the uptrend channel to open long positions (to buy) - these are the most profitable signals. The resistance of the ascending channel in this case is the most important point of reference for short-term trades against the trend - from the upper limit of the ascending channel, you can open short positions (sales).
  In a falling market, the channel is descending, so a deal against the trend from its lower border will be a long position (buy), and from the upper border in the direction of a downward trend - short positions (sell).
  
  
• Crossing the channel boundaries may be a signal that the trend continues. This happens when the price breaks through and settles outside the channel boundaries, under or above the channel resistance. When it breaks through the upper limit of the ascending channel, it indicates that the trend is accelerating, and it may make sense for traders to activate purchases or open long positions. If it breaks through the lower boundary of the uptrend channel, it is a signal of a trend reversal, and it is better to open short positions.
  

The approximate size of the falling price most often corresponds to the width of the range. The situation will be the opposite for a falling market with a descending corridor.

4. HOW TO BUILD A PRICE CHANNEL?

To do this, you need at least three points on the chart.

• Two of them define a line of resistance or support, the third should be opposite to the first two.
  
• To build an uptrend channel, we need to understand where the trend movement begins.
  
• Determine from two local gradually ascending minimum points where the trend line should be drawn. These two local points will be the reference points, and the constructed line will be the base support line for the channel.
  
• Then draw another line parallel to the obtained line, which should pass through the highest point of the maximum - the very point opposite to the first two, which is located between the polls.
  

We do the same for descending price channels - only in this case we draw resistance instead of support, the main line should pass through the highs, and the second trend line should pass through the minimum.

The way to determine if you are dealing with a range is to allow the price to touch both levels, resistance and support, at least twice, and the levels should be horizontal.

5. HOW TO TRADE IN THE PRICE CHANNEL


Trading in a price channel reveals a variety of strategies - trade either inside the channel, buy or sell from resistance or support. Or a breakout of the price channel.

• Intra-Channel Trading:
  Traders are pushed away from the channel boundaries. There is too high a probability that the price will move inside the channel and push off from its borders. Therefore, it makes sense to sell when the price reaches the upper limit, and buy when it reaches the lower limit.
  
  
• Trading on breakouts
  You need to understand that any channel, depending on the time, will be broken - and at this time there will be a strong price movement, on which the trader can make a big profit.
  It is convenient to use pending orders placed above the channel border for trading on a breakout. As soon as the price breaks through the channel boundary and reaches the pending order, it is triggered automatically.
  

Let's summarize:
Price channels are an excellent basis for trading strategies, as they are based on support and resistance lines.
All channels end with a breakdown depending on the time, so you should not trade without a stop loss when trading inside the channel.
You should not perceive the boundaries of the channel as something indestructible.
The price can easily skip the channel boundary or, conversely, make a false breakthrough.
You can trade inside or outside the channel, and both strategies can be combined.

And most importantly: technical analysis will allow you to always stay on the right side of the market!


Regards! R.Linda!