Channels

 

A bit more complex than single trend line, channel is formed by two parallel trend lines. The upper line is connected by higher highs (for up-channel) or lower highs (for down-channel), while the lower line is connected by higher lows (for up-channel) or lower lows (for down-channel). Upper line acts as a sloping resistance and lower line acts as a sloping support. If upper line is a horizontal resistance and lower line is a horizontal support, we will have a sideways channel. The channel is like a tube that price tends to rebounce within.

Up channel Down channel Sideways channel

A larger channel (major channel) can be formed by several smaller channels (minor channel).

 

How to draw a channel correctly?

 

First, you have to determine a potential single trend line by connecting two higher lows (for up-channel) or two lower highs (for down-channel). Then, try to find a parallel line that connects two higher highs (for up-channel) or two lower lows (for down-channel). Borders of the channel might be narrow bands, not necessary exact lines. Remember that don't try draw a channel by your emotion.

 

How reliable is a channel?

 

Similar to trend line, the channel also have some factors to determine its reliability:

 

The more times the channel is touched, the more reliable the channel.

 

- The less sloping the channel, the more reliable the channel.

 

- The wider space within the channel, the more reliable the channel.

 

- The longer timeframe the channel is formed in, the more reliable the channel (major channel is better than minor channel).

 

How to trade the channel?

 

Trading the channel is mostly similar to trading the trend line, but moreover you can trade two directions with channel when the price touch each of its borders. When price touch channel's border it will either bounce back within or break out the channel. Then, we have two ways to set the trap to catch it.

 

Follow the channel

 

The rule is quite simple: Buy when the price touched the lower line and sell when the price touched the upper line. To avoid wrong preditction, just wait for the confirm candlestick completly closed. Another way is using limit order at the touching point. The exit point could be the touched points at the opposite border of the channel.

Follow the channel

Something should be noted when follow the channel:

 

- The vertical distance of the rebounce on the same direction of the channel is longer than the vertical distance of the opposite rebounce. That means you can earn more profit if place an order in the same direction of the channel than the other direction.

 

- The rebounce on the opposite direction of the channel is more likely to occur than the rebounce on the same direction of the channel (one border likely to stronger than the other). That means you have more opportunity to success if place an order in the opposite direction of the channel than the other direction.

Channel longer and shorter profitChannel's stronger and weaker border

Trade channel break-out

 

You have already known about support/resistance break-out and trend line break-out, then channel break-out is very similar. We will wait until there is a candlestick crossed beyond the channel's border and closed completely outside the channel. Another way is setting a stop order at the outside of the channel. That's the signal of a channel break-out.

 

Although a channel can be broken-out in any direction, it's more likely to break-out in the opposite direction of the channel (as a reversal) than the following direction because if market want to express its trend, it just need to keep the channel continue  (except at some event release).

Channel break-out

The take-profit distance of a channel break-out can be set as equal to the vertical width of the channel. You can set it longer or shorter depend on the strength of the channel (stronger channel causes farther break-out).

 

However, always be aware of fake-out signal. This fake signal might happen with channel at anytime. Just wait for the confirm candlestick completely closed or set a stop order wisely.

 

Conclusion

 

As you see, channel trading is another useful tool to trade the trend. Here is the brief of this lesson:

 

- Channel is formed by two parallel potential single trend lines.

 

Measuring the reability of the channel to plan trading it.

 

- It is possible to follow the channel if either touching candlestick closed inside the channel or using a limit order.

 

- It is possible to trade the channel break-out if either touching candlestick closed outside the channel or using a stop order.