ou not only have trend lines, as we mentioned in our previous lesson, but also you can create trend channels if you draw a parallel line at the same angle of your already drawn line(uptrend or downtrend line).
Trend channels can be as entertaining as your TV channels. What’s more your TV channels take money out of your pocket every month and don’t bring you any money in return.
But trend channels can do the exact opposite, they can lead you to makе profit if you use them to determine good places to buy or sell.
They are also called price channels.
As you already know your upper trend line marks resistance and your lower trend line marks support. When you draw a parallel line and create a channel, it represents some potential areas of support or resistance.
Same as the trend line, trend channels who have a negative slope (down) are called bearish and those who have a positive slope (up) are bullish.
There are three types of channels:
- Ascending channel (higher highs and higher lows)
- Descending channel (lower highs and lower lows)
- Horizontal channel (ranging)
If you want to build an up (ascending) channel, you need to draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the highest point of the wave.
In the case of a bullish trend channel, it can be expected that the price will continue to move in an upward direction, meaning that the tool will become more expensive. When the price touches the UPPER trend line, this may be used as a selling area.
If you want to build a down (descending) channel, you need to draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the lowest point of the wave.
In case of a bearish trend channel, it can be expected that the price will continue to move in a downward direction, meaning that the tool will become cheaper. When the price touches the LOWER trend line, this may be used as a buying area.
Don’t forget that if you want to create a trend channel, both trend lines must be parallel to each other!!
The bottom of this trend channel is considered a “buy zone” while the top of this trend channel is considered a “sell zone”.
If the upper and lower limits of the price are being a limit TWICE each. Then they become support and resistance, this trend channel is verified. If the line of support and resistance is based on only one point, then it can be considered unconfirmed.
You MUST NOT:
You should NOT trade in the inner zone of the channel, but when the price is touching the borders – buy and sell levels.
If it is not far enough, it will lead to a loss of position if the price slightly leaves the channel lines.
Don’t hurry. It is recommended to wait for the closing of the first opposite fractal, which is associated with frequent re-checks of the channel boundaries.
Don’t close the position manually. It is better to do this using stop orders and when the price approaches the limits.
If you can’t make a parallel line, DO NOT EVER force the price to the channels that you draw!
This doesn’t mean that trend channels have to be completely parallel. Neither does 100% of price action have to fit within the channel.
Don’t look for textbook price patterns! They don’t happen often!