3.4 Trading with Price Channels in Forex

If you merged what we learnt on support and resistances with trend lines, we would pretty much be on our way to understanding what channels are all about. In fact some of the examples used in the previous two lessons were of channels.

How do we identify a channel?

Let’s say we are looking at a trend line in an uptrend of a currency pair. Let’s call this the basic trend line. Very often, you’ll see that prices bounce off this basic line, go up and again come down to the basic line. This could be repeated many times. Now, in addition to drawing the basic trend line (remember points A, B and C) suppose we also drew a parallel line joining the series of points that the price touched before returning to the base line (the ‘tops’), then we would have drawn a ‘return’ line.

A price channel comes into the picture if the support and resistance lines are parallel to each other. During an uptrend we may get an "Ascending Channel", downtrends may produce a "Descending Channel" and during sideways market we may get a "Horizontal Channel".

See the examples of all the above mentioned price channels in the following Forex charts:

In fact the horizontal channels as known as Rectangles and you will learn about those a bit later.

The price movement area enclosed between the basic and return lines is the trend channel, or simply, the channel.

The Quick and dirty way to draw channels:

• Draw the basic trend line.

• Right away, draw a parallel line (the ‘return’ line) to the basic line, but position it at the latest ‘top’ if the basic line is an uptrend. You just created an ascending channel.

• If the basic line is a downtrend, position the return line at the most return trough. You just created a descending channel.

• If the basic line was a horizontal one, as in the case of a sideways trend, the return line would likely be a parallel and horizontal line. You would have created a horizontal price channel.

• See the previous charts and you’ll be clear.

How do we trade with channels to earn money?

Right away you would have noticed that the area near the basic trend line of the channel would be a great place to put in buy orders. Why? Because prices bounce off this level – ah ha!Its a support zone.

And obviously, the area near the return line is a good place to sell because it is a predictable resistance zone.

Just remember – in a valid price channel the basic and return lines must be parallel.

And also remember - just like the basic trend lines, the price-action channels are also drawn considering the support and resistance zones and NOT exact price points. You are not living in an ideal world ... AND "No one" can be an ideal trader to be able to buy at the bottoms and sell at the peaks. Buy a bit above the supports with stop-loss order slightly below the supports and similarly sell slightly below the resistances and ENJOY the Channels.

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