Identifying Channels
What are Channels?
When prices move between two parallel lines, they form a channel. Channels can be upward sloping,
downward sloping, or horizontal (sideways trend).
Types of Channels
- Ascending Channel: An upward-sloping channel where prices move between a rising support line and a parallel rising resistance line.
- Trading Strategy: Traders typically enter long positions near the lower bound (support line) and take profit near the upper bound (resistance line).
- Breakout Implications: A breakout above the upper bound may signal trend acceleration, while a breakout below the lower bound may indicate a trend reversal.
- Descending Channel: A downward-sloping channel where prices move between a declining resistance line and a parallel declining support line.
- Trading Strategy: Traders often enter short positions near the upper bound (resistance line) and take profit near the lower bound (support line).
- Breakout Implications: A breakout below the lower bound may signal trend acceleration, while a breakout above the upper bound may indicate a trend reversal.
- Horizontal Channel: A sideways channel where prices move between a horizontal support line and a parallel horizontal resistance line.
- Trading Strategy: Traders usually buy near the support line and sell near theD resistance line.
- Breakout Implications: A breakout above the resistance line may indicate the start of a new uptrend, while a breakout below the support line may signal the beginning of a downtrend.
Identifying Channels
Channels are identified by drawing parallel lines that connect the swing highs and swing lows of a price
movement. They are useful for identifying potential support and resistance levels within a defined
range.
- Upward Channel Example: Connecting higher lows with a support line and drawing a parallel resistance line through the higher highs.
- Downward Channel Example: Connecting lower highs with a resistance line and drawing a parallel support line through the lower lows.
- Horizontal Channel Example: Connecting swing highs and swing lows with horizontal lines.
