When trading a channel, you use parallel lines connecting the swing highs and swing lows of a market’s support and resistance.
The most common method to mark a channel is by using trendlines.
The swing highs that are marked by the trendline are known as the channel’s resistance levels. The swing lows that are connected to create the channel become the support level.
As discussed below, these levels can then be used to find ‘bounce’ trades and breakouts.
Trading the price channel is a very popular method of technical analysis because you can use it on all time frames and in many markets, including stocks and Forex.
You can use a channel to find support and resistance as the price continues to move higher or lower, and you can use it to find potential breakout trades.
Whilst there are other strategies that are used with channels such as the break and retest and the horizontal strategy, four popular strategies are;
An ascending channel is where the price is moving higher.
With this channel, price is making higher highs and higher lows.
The easiest way to take advantage of this type of channel is by first identifying the trend higher and the channel.
Once you have done this, you can begin to look for both long and short trades depending on how aggressive you are.
The higher probability trades are always with the trend. This means looking to take long trades from the support of the channel when the price moves into the low.
Aggressive traders may look to trade against the trend when the price moves into the resistance of the channel and for the price to move back lower.
A descending channel is when the price is moving lower.
With this type of channel, price is making a series of lower highs and lower lows that you will be able to connect with your trendlines.
The two ways you could look to trade the descending channel depend on how aggressive you are.
If you are a trend trader looking to put the odds in your favor, you may look to go short when the price moves higher and back into the resistance of the channel. This would then be trading in line with the trend lower.
If you are more aggressive, you may consider looking to trade against the trend and look for long bullish trades when the price moves into the channel’s support level.
This is a very popular channel trading strategy.
With this strategy, you are looking for the channel to break and take advantage of the possible explosive momentum.
As the example shows below, the price holds the ascending breakout before finally making a strong breakout higher.
Importantly price also made a strong close above the upper trendline area.
When the price moved back lower, you will also note that this old channel level held as a new support level.
One other thing to note is that the longer the channel holds, the stronger the breakout will be when it occurs.
Channel levels will regularly false break.
You will often see price pop above or below the channel support or resistance before snapping back in the opposite direction right back into the channel.
This gives you an opportunity if you are a false break trader.
As the example shows below, the price was in a channel moving lower.
The price tested the resistance of the channel before popping out just higher. It then snapped back lower, forming a bearish engulfing bar to signal a potential false break and lower prices.
Just like in this example, you can use your Japanese candlesticks when looking for potential channel trade entries.
Single Currency – EUR (Euro)
Loonie – CAD (Canadian dollar)
Swissie – CHF (Swiss franc)
Aussie – AUD (Australian dollar)
Kiwi – NZD (New Zealand dollar)
Greenback, Buck – USD (U.S. dollar)
Sterling, Pound sterling – GBP (British pound)