How To Trade Channels

A channel is a chart pattern consisting of two parallel trendlines connecting swing highs and swing lows. This pattern presents great trading opportunities since the trendlines act as support and resistance levels.

Channels are also an excellent tool to analyze trend continuation or reversals since prices stay within the channel until a breakout occurs.

Types of channel patterns

Channels can be broken down into 3 patterns:

Ascending channel

Occurs during an uptrend when the market is making higher highs and higher lows. Draw the trendline by connecting the higher lows, drawing a parallel channel line, and connecting it to the higher highs.

(Source – TradingView)

 

Descending channel

Occurs during a downtrend when the market is making lower lows and lower highs. Draw the trendline by connecting the lower highs, drawing a parallel channel line, and connecting it to the lower lows.

(Source – TradingView)

 

Horizontal channel

When the market is ranging, price is contained in a horizontal channel.

(Source – TradingView)

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Trading Channels

You can trade channel patterns in one of the following ways. Chose whichever approach appeals to you the most.

  • Since both trendlines act as support and resistance, use these levels to open and exit positions.
  • Trade in the direction of the trend if there is a breakout of the channel line. Breakouts can indicate strong momentum and trend continuation. Just stay alert to the possibility of false breakouts.

Support and resistance channel trading

Buy trade

  1. When the market is in an uptrend, connect the trendline to the higher lows and parallel channel line to the higher highs. There should be at least 2 swing points connected for a valid channel.
  2. Wait for price to retrace and test the lower trendline.
  3. Place a buy trade if the market prints a bullish candlestick.
  4. Set your stop loss below the trendline and recent price action.
  5. Close the position when the market tests the upper trendline (channel line).

(Source – TradingView)

 

Sell trade

  1. When the market is in a downtrend, connect the trendline to the lower highs and parallel channel line to the lower lows. There should be at least 2 swing points connected for a valid channel.
  2. Wait for price to retrace and test the upper trendline.
  3. Place a sell trade if the market prints a bearish candlestick.
  4. Set your stop loss above the trendline and recent price action.
  5. Close the position when the market tests the lower trendline (channel line).

(Source – TradingView)

Breakout channel trading

Buy trade

  1. Draw an ascending channel (using the steps from earlier) during an uptrend.
  2. Stay alert when the market is at the upper trendline (channel line), waiting for a possible breakout.
  3. If a bullish candlestick closes above the channel line, open a buy position.
  4. Set your take profit at the next significant resistance level.

(Source – TradingView)

 

Sell trade

  1. Draw a descending channel (using the steps from earlier) during a downtrend.
  2. Stay alert when the market is at the lower trendline (channel line), waiting for a possible breakout.
  3. If a bearish candlestick closes below the channel line, open a sell position.
  4. Set your take profit at the next significant support level.

(Source – TradingView)

What else can channels tell us?

Breakouts of channels in the opposite direction to the trend indicate a possible reversal.

  • In an uptrend, a breakout of the lower trendline could lead to a reversal.
  • In a downtrend, a breakout of the upper trendline could lead to a reversal.

Conclusion

No wonder technical analysts love channels. Let’s sum up why:

  • Can be the basis of trades.
  • Used to analyze trends.
  • “Predict” continuation and even reversals.

 

Are you ready to test out your new knowledge? Open an account with FXCM or AvaTrade and start trading those channels.

May the market be with you.

Channels FAQ

A channel is a technical analysis pattern made up of two parallel trendlines connecting swing points.

Channels can be ascending (uptrend), descending (downtrend), and horizontal (range).

Buy when the market tests the lower trendline (support) and exit when price reaches the upper trendline (resistance).

Sell when the market tests the upper trendline (resistance) and exit when price reaches the lower trendline (support).

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Guy Seynaeve

Guy Seynaeve

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