Price Channel is a fundamental technical analysis tool widely used in Forex and Fixed Time Trade. With just a few simple strokes, you can trade and make profits with them.
However, many traders look down on it or ignore it because they are busy looking for advanced things with the thinking that the more complicated, the higher the accuracy. It’s a pity that they are going on the wrong way. If you do not know how to draw a price channel or still can’t find its most effective trading strategy, this article is for you.
What is Price Channel?
Price Channel is a concept used to refer to a type of technical analysis tool in the financial market. It has the effect of identifying the status and range of price movements. Thereby, it can help traders catch favorable buying and selling opportunities during trading.
You can draw the price channel on the chart by two parallel lines, in there:
- A line can change in an uptrend, downtrend, or sideways. This line represents the current trading trend (often called the “trendline”).
- The other one will be parallel to the trendline.
- The space between these two lines covers most of the price levels of the current trend in a specific period.
The upper trendline is considered a potential resistance level. Conversely, the below trendline is known as support.
Types of Price Channels in Forex trading
Price Channel in Forex consists of 3 types – Ascending, Descending, and Horizontal.
Ascending channel will have the form of two upward parallel lines in which the price oscillates between them.
The price breaks the ascending channel in case it falls into a strong bearish or bullish state. At the time, the price will fall outside the lower trendline or exceed the upper trendline.
Descending channel will have the form of two downward parallel lines. Similar to the ascending channel, the price moves within the space between these two lines.
Descending channel falls into a broken state when the price breaks out of the trendlines and moves up or sideways.
The Horizontal channel is dedicated to price levels with unclear fluctuations and no specific level of increase or decrease. This price level, over the specified period, does not change much. The feature of this channel is that the top and bottom are almost equal.
Horizontal channel is broken when the price fluctuates then rises upward strongly or plummets beyond the trendline.
How to draw Price Channel
– First, you have to identify the line below. It is the trendline of the ascending channel. Draw another line parallel to the trendline so that this line can touch as many peaks as possible.
– A descending channel is created by identifying the line located above first. That is the trendline of the descending channel. Draw another line parallel to it so that this line can touch as many troughs as possible.
– A horizontal channel is formed by identifying both trend lines. You can draw the upper line by connecting the peaks. Similarly, draw the lower line by connecting the troughs.
Price Channel trading strategies
Traders can make effective trading decisions with the price channel in two basic ways, trend trading, and breakout trading.
In an uptrend, we should observe the price, wait for it to bounce back and touch the support line of the price channel, then open a bullish order. Never open a bearish order when this price level hits the resistance. Set Stop Loss as the nearby trough and Take Profit as the resistance line of the trend channel.
And do the opposite if you are trading in a downtrend.
At a certain point in time, both support and resistance levels seem to “no longer make sense”. At that time, the price channel can’t also exist when the price breaks out of the two trendlines and moves in a new direction.
In the image above, when the price breaks out of the resistance in an uptrend, open a bullish order immediately. Set stop loss as the nearest trough and take profit as double the distance from stop loss to the entry point.
Above are the effective trading strategies with Price Channel that I would like to introduce to you. Hopefully, through this article, you will have a better understanding of its meaning and how to trade with it.
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