Price Channel in Trading: How to Draw and Use
This overview is dedicated to the use of price channels in retail: What does this term mean? How to find the price channel on the chart? Where to open and close trading positions?
What is a price channel?
According to the definition of technological analysis, a price channel is an asset price fluctuation between two parallel support and resistance lines in the current trend.
In other words, a price channel appears on the chart when the price movement of a certain asset over a certain period of time is bounded by two parallel lines: one up, one down.
Depending on the direction of the support and resistance lines, three main types of price channels can be distinguished:
Upward Price Channel: The line is directed upwards, the market is growing
Price channel descending: the line is directed downwards, the market is going down
Side price channel: horizontal line, the price fluctuates within a limited range.
Traders, and especially those using technical analysis, look for price patterns on charts that can help them make trading decisions. The price channel is one of these important chart patterns.
By analyzing the direction of the price channel, traders can determine the prevailing market trend and work accordingly.
Let's select the advantages of the price channel:
It helps determine market trends, which in turn provide instructions for trading;
It shows promising entry and exit points;
While the quote remains within the channel, its borders provide a good trading benchmark;
This signals a change in trend. When a quote exits the channel, it can mean an acceleration of the trend, or its end and reversal.
How to trade on the price channel
Remember the tech analysis motto? It says: “The trend is your friend”, i.e. you should trade the trend. When a trader finds an active price channel on the chart, he not only sees the direction of the trend, but also finds interesting entry and exit points for his position. Let's discuss the classic way of trading price channels.
Trading with ascending channel
Channels form in an uptrend: each new high is above the previous one, as is each new low. The support line makes the lows – this is the main line of the channel, the trend line. The resistance line crosses the highs. Only valid purchases in ascending channel.
Main trade routes:
The main thing is that purchases are opened only in the support line. Stop loss is placed below this line. Positions are closed at the resistance line. The trade can go like this while the price stays in the channel.
If the price breaks the support line, the bullish momentum ends. The price exits the channel and reverses. Sales can now be considered.
Trading with the descending channel
The channel is formed in an active downtrend: each new high is lower than the previous one, as is each new low. The resistance line runs through the highs – this is the main line of the channel (trend line). The support level is crossing the lows. Only sell trades can be opened in the descending price channel.
Main Trading Principles:
Most importantly, sell is only opened at the resistance line. Stop loss is placed above this line. Positions are closed at the support line. Trading can continue until the price exits the channel.
If the price breaks above the resistance line, the trade ends. The trend can reverse and long positions can be opened.
Trade sideways channel
This channel means that the market is not currently trending, it is flat. The tides do not increase or decrease, but remain approximately at the same level. The channel's resistance line passes through the highs and the support levels – through the lows. On this channel they are the same. Quotes do not have a clear direction, which means that traders can buy and sell.
Main Trading Principles:
Trading can go both ways. Sell at the resistance line, place SL behind it and close the position at the support line.
Buy from the support line, place SL below it and close your position at the resistance line.
When the price breaks through the barrier, the flat ends and a price push begins. Positions can be opened towards breakaways with SL crossing the nearest channel line.
Example of trading in a sideways channel
Trade with dynamic price channels
In addition to classic technology analysis channels, dynamic channels are also used. In it, support and resistance lines are calculated with special tools and do not run parallel.
The lines circle the quotes on the chart and follow the price. To calculate channel boundaries, traders usually use moving averages and their standard deviations.