What are trading channels? A trading channel is a chart pattern highlighted by two parallel lines: an upper line (resistance) and a lower line (support). The price moves within the middle of these lines.
Trading Channel Basics
There are three main types of channels:
- Horizontal channels
- Ascending channels
- Descending channels
Horizontal channels represent sideway trend on the market.
Ascending channels represent up trend
Descending channels represent down trend.
Channels are helping us to identify trend on the market easily.
How to draw channels?
Since channels represent trendlines, all we need to do is connect the tops or bottoms, and we will obtain a channel. By making minor adjustments, we can position the channel indicator in the correct location on the chart. Please refer to the examples in the image below.
- Channels are not look perfect on the charts!
- Channels are great to show us current trend.
How to trade horizontal channels?
Once the channel is established, we sell at the top of the channel at the resistance level. We buy at the bottom of the channel at the support level.
Open buy at the support, place stop loss below the support and take profit should be around resistance.
How to open sell position?
How to trade ascending channels?
Ascending channels help us identify uptrends. We only buy at the bottom of the ascending channels.
You should open a buying position every time the price is near the support line (bottom line of the channel). Place a stop loss at a safe level below the support. Take profit should be in the middle of the channel or at the top of the channel at resistance.
How to trade descending channels?
Descending channels help us identify downtrends. We only sell at the top of the descending channels.
You should open a selling position every time the price is near the resistance line (top line of the channel). Place a stop loss at a safe level above the resistance. Take profit should be in the middle of the channel or at the bottom of the channel at support.
For more information about channels check video bellow:
We can use the middle levels of the channel for buying and selling if they become support for buying or resistance for selling. Please check the image below.
We can use ascending channels in the same way; we can use the middle channel level to enter buy trades. Please see the image below:
For descending channels use the same, check image below:
- We are using middle levels when the trend is to strong
- Or we didn’t enter the trade on time.
There is another advanced technique for trading channels where we use tops or bottoms to enter trades. However, this technique requires more experience to use effectively.
For more information, please refer to the images below.
If you want to find out more about advanced channels watch video below:
Each channel type contains support and resistance levels. The support is the bottom level line of the channel, and the resistance is the top level of the channel.
The price can break these levels upwards (break resistance) or downwards (break support). Once the price breaks these levels, we can consider trading in the direction of the breakout.
Here are some examples of breakout scenarios for horizontal channels, including resistance and support breakouts:
Example for ascending channel breakouts, resistance and support breakouts:
Example for descending breakouts, resistance and support breakouts:
How to trade channel breakouts: