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Channeling - Forex Trading


Channeling is an important tool not only to determine which sub waves belong together, but also to project targets for the next wave up. Channels are parallel lines, which more or less contain the complete price movement of a wave. Although the trend lines of a Triangle are not parallel lines, they will also be considered as a channel. Underneath you see an example of a channel in an impulsive wave and all channels in a corrective wave. Note that all patterns in the section “Patterns” show their channels. The picture of the corrective structure labeled A,B,C shows clearly how channels indicate which waves should be grouped together.  
  Waves of the same degree can be recognized by drawing channels. Especially this is the case for Impulse (5) wave structures, Zigzags and Triangles. If these waves do not equate properly, you have a strong indication to search for an alternative count. Next you will learn how to draw channels and how to project targets using channels.

Targets for wave 3 or C

To begin with you should draw a channel as soon as waves 1 and 2 are finished. Connect the origin of wave 1, which has been labeled as zero, and the end of wave 2. Then draw a parallel line from the top of wave 1. Generally this channel is regarded as not being very useful, but it is. First of all, the parallel line serves as an absolute minimum target for the 3rd wave under development. If the 3rd wave can’t break through the upper line or fails to reach it, you are probably dealing with a C wave instead of wave 3. Furthermore the base line from 0 to wave 2 serves as a stop. When this base line gets broken, there is a strong probability that wave 2 (or B) gets more complex, thus wave 3 or C has not begun yet. Keep in mind that wave 3 is normally the strongest wave and often will go far beyond the upper trend line.  

Targets for wave 4

As soon as wave 3 is finished you can draw a channel by connecting the end of wave 1 and wave 3 with a trend line and drawing a parallel line from the end of wave 2. In this way you can project a target for wave 4. Keep in mind that normally the base line from wave 2 will be broken slightly by the price action of wave 4. The base line serves as a minimum target for wave 4. If wave 4 doesn’t come near the base line at all, this is a sign of a very strong trend. You are probably still in wave 3 or you should get ready for a blow off in wave 5.

Targets for wave 5

       Method 1

As soon as wave 4 is finished you can draw a channel connecting the end of wave 2 and wave 4 with a trend line by drawing a parallel line from the end of wave 3. In this way you can project a target for wave 5. In most cases wave 5 will fail to reach the upper trend line, except when you are dealing with an extension in wave 5 or when wave 3 has been relatively weak. In an extension, which is also indicated by high volume and momentum indicators, a throw over can occur.

       Method 2

Mostly wave 3 is the strongest wave showing a very fast acceleration relative to waves 1 and 5. If wave 3 indeed shows a nearly vertical rise or decline, then draw a trend line connecting wave 2 and 4 and draw a parallel line from wave 1(!). This parallel line will cut through wave 3 and will target wave 5. Experience shows this to be a very valuable channel.

Targets for wave D and E

As soon as wave B is finished you can draw a trend line connecting the origin of wave A and the end of wave B to get a target for wave D, provided a triangle indeed is developing. This is more certain after completion of wave C. As soon as wave C is finished you can draw a trend line connecting wave A and the end of wave C to get a target for wave E. Wave E almost never stops at the trend line precisely, it either never reaches the trend line or it overshoots the trend line fast and temporarily.

Targets in a Double Zigzag

Drawing a channel is very useful to separate Double Zigzags from impulsive waves, which is difficult since both have impulsive characteristics. Double Zigzags tend to fit a channel almost perfectly, while in an impulsive wave the third wave clearly breaks out of the channel.

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