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Forex Price Channels & How to Draw & Use them Correctly? - Forex Function

Forex Price Channels & How to Draw & Use them Correctly?

Last Update: 18 December,2016
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The channels, which we will go through now, are a little different than our normal television channels. Yup, these are not like Discovery, ABC or any movie channel.

Trading Forex Trend Channels

These are the channels that have potential by which we can build a fortune, these are forex trading price channels, but it is very important that we should learn everything about these price channels before making a trading decision.

What is a Forex Trading Price Channel?

Price channels also known as Trend Channels are an important tool in technical analysis and are an extension of trend lines; while building trend lines we draw a single line to identify the trend direction, and it is very common that many times we find currency pair price’s respecting and testing positively on the trend line, and when prices are testing positively, we benefit from them on a single side i.e. either we get the potential future entry or exit points. In the similar way, in order to benefit from another side, a channel line with the same angle is drawn parallel to the initial trend line which builds a price channel.

A price channel is the area between two parallel lines; one is the main trend line, and another is the channel line. In a trending market, price action is often seen to move in a proportionate trading range, as a result, in order to benefit from them a price channel is drawn. The upper trend line connects the price points of swing high’s, and the lower trend line connects the price points of swing low’s. Upper trend line acts as a resistance level, and lower trend line acts as a support level.

A price channel is one of the most useful trading tools in technical analysis. If the prices are respecting the price channels, we can easily understand the strength of the current trend and accelerate as accordingly, a failure to test any of the trend lines is an indication that the current trend is losing its momentum and might show a new direction to follow. Price channel trading strategy is useful for short term to medium term trading.

There are 3 Types of Price Channels
1. Bullish Channel (Higher High’s and Higher Low’s)
2. Bearish Channel (Lower High’s and Lower Low’s)
3. Sideways Channel (Ranging)

Kindly remember price channel means a channel with two parallel lines and a channel where price respects both the trend lines if the price action is not respecting both the trend lines then it is not a valid price channel. Now, let’s see all the three types of price channels with examples.

Bullish Channel also known as Ascending, Upward, Inclining Trend Channel

A bullish channel is a price channel built by two parallel ascending diagonal lines, which start from a lower price point and continues on advancing diagonally until the price action respects both the upper and lower trend line.

bullish-channel-set-up

AUDUSD, 1 Hour Chart – Bullish Price Channel
Bullish channel is a price channel where the upper trend line connects the price points of higher swing high’s, and the lower trend line connects the price points of higher swing low’s. Price action accelerating above the upper trend line indicates a strong bullish momentum, but if, at any given point of time, price action closes below the lower trend line indicates that there is a huge possibility of market changing its direction.

Bearish Channel also known as Descending, Downward, Declining Trend Channel

A bearish channel is a price channel built by two parallel descending diagonal lines, which start from a higher price point and continues on declining diagonally until the price action respects both the upper and lower trend line.

bearish-channel-set-up

AUDUSD, 1 Hour Chart – Bearish Price Channel
Bearish channel is a price channel where the lower trend line connects the price points of lower swing low’s, and the upper trend line connects the price points of lower swing high’s. Price action accelerating below the upper trend line indicates a strong bearish momentum, but if, at any given point of time, price action closes above the higher trend line indicates that there is a huge possibility of market changing its direction.

Sideways Channel also known as Horizontal, Ranging Trend Channel

A sideways channel is a price channel built by two parallel horizontal lines, which continues until the price action respects both the upper and lower trend line.

sideway-channel-set-up

EURUSD, 1 Hour Chart – Sideways Price Channel
Sideways channel is a price channel built in a sideways ranging market where the upper trend line connects the price points of swing high’s, and the lower trend line connects the price points of swing low’s. Price action accelerating on any side of the trend line indicates a breakout and there is a huge possibility of market changing its direction.

A Couple of Important Facts (Secrets) about Price Channels


• The perfect price channel is always built by 2 trend lines parallel to each other.
• The upper trend line acts as a resistance level indicating a selling zone, and the lower trend line acts as a support level indicating a buying zone.
• Sometimes prices may not perfectly follow the price channel and might penetrate through the trend lines, but they should not close in the opposite direction of the price channel i.e. a price channel is a trend channel, which indicates a rough idea of resistance and support levels as according to the speed of trend.
• Do not ever force the price channel to adjust according to the price action. If the price action is not respecting both the trend lines parallel to each other, then it is not a valid price channel.

Conclusion

Price channels may not be perfectly portrayed every time; the price does penetrate a little above and below, as a result, price channels indicates the rough estimation of future buying and selling zones. Trading with a bigger picture in mind is always helpful. A price channel should be used as a tool in our trading strategy in order to filter and confirm a trade setup. The more you’ll practice, the more you’ll master the art of using price channels.


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