Prices often move between two parallel trend lines, forming price channels. Reaching one trend line is followed by a bounce to the parallel one, creating a channel of support and resistance.

In an upward trend, the main line passes through the lows, after which a parallel one is built through the highs. The price channel remains valid until the support is broken. In a downward trend, the same approach is applied – a trend line through the declining highs and a parallel one through the lows. The channel is broken when the resistance is broken.

Chart 1: Downtrend Price Channel. Chart: MetaTrader4

Chart 1: Downtrend Price Channel. Chart: MetaTrader4

The chart above shows a descending price channel. A trend line is built through the tops, which plays the role of resistance. The parallel line of support has limited the individual price declines, thus forming the channel. The break at the end of the chart was fake.

This configuration opens up various possibilities. A quick glance shows that good selling zones are being created around the resistance line. With a stop above the previous high and a price target parallel to the support line, positions will be opened at a risk/reward ratio of approximately 1:2.

This is just one example, but price channels offer multiple opportunities to develop a comprehensive trading strategy related to them. It is normal to apply them in combination with other TA techniques. For example, moving averages are a good trend-following indicator and would contribute to trend identification.

Each technical analyst must make certain decisions when constructing the channel. The choice of points for the main trend line is subjective. It can be said that the longer a bottom or top is left unbroken, the more significant it will be. Accordingly, more conservative players will construct their trend channel through these points. This will bring them the peace of mind that change has indeed occurred when the trend line is broken.

It is common practice to draw different trend lines through different lows, thereby defining alternative price paths.

Most often, traders look for an opportunity to open a position in line with the main trend. The one-hour price channel from Chart 2 is in sync with the daily channel. Purchases around the hourly support line will have a good chance of success.

Chart 2: Uptrend Price Channel. Chart: MetaTrader4

Chart 2: Uptrend Price Channel. Chart: MetaTrader4

Sometimes the chart does not offer perfect parallel lows and highs. In the uptrend, it is more important that the lows are precise as they determine the slope of the support line. The location of the parallel resistance line allows for a looser interpretation. However, if it is part of a trading strategy, it should be built close enough to be reachable and far enough away to provide meaningful profit-taking distance.

The same logic applies when the trend is downward. The falling resistance line will be built with priority, then a parallel one will be found.

Towards the end of the movement from Chart 2, there was one false break. The definition of “break” is subjective. More conservative traders will wait to see some price action outside the channel before assuming it as broken. These decisions are again individual depending on the desire for an early reaction on market changes.

The price corridor does not exhaust its meaning after its break. Broken support turns into resistance and vice versa. The channel can also be used to define a future price target for the newly emerging movement. It is equal to the distance between the two parallel lines and is applied to the break point.  

Chart 3: Price Channel Break. Chart: MetaTrader4

Chart 3: Price Channel Break. Chart: MetaTrader4

It is logical to further refine the price target using, for example, Fibonacci corrective levels.

Price channels can also be constructed when prices have no clear direction and are consolidating.

Chart 4: Sideways Channel. Chart: MetaTrader4

Chart 4: Sideways Channel. Chart: MetaTrader4

The chart shows how the downtrend has encountered temporary support. The prices have entered a period of almost sideways movement. In the first part of that period, prices have risen slightly. The red price channel has reflected this pettern and its future break would be important. During the blue channel, sellers gradually prevailed, after which the decline was restored.

Trend lines and price channels are among the most commonly used technics of TA. They identify supports and resistances and create a price projection. It can be said that the main disadvantage of the channels is that a certain part of the price movement must have already taken place in order to be able to select suitable bottoms and tops to construct the lines (at least 2 lows and 2 highs).

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