Forex Channel and Trading range
Channels are the technical analysis tools.
The channel is a corridor, within which the price chart is moving, limited by the support lien below and the resistance line above. The longer price is moving within the channel, the higher probability that it will leave it. Channels are identified by superimposing support and resistance levels on a single line chart. Channels can slope upward, sideways or downward.
There are three types of channels:
- bull - ascending channel;
- bear - descending channel;
- flat or range (trendless);
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you created the trend line.
When prices hit the bottom trend line this may be used as a buying area. When prices hit the upper trend line this may be used as a selling area.
The channel is broken, when price breaks through support or resistance. Resistance breaking of the bull channel is a good signal for buying, and it is vice versa for the bear channel. In case of a lateral channel, the signal is weaker. When support on the bull channel and resistance on the bear channel are broken, a weak signal for selling/buying is received (it is better to receive confirmation from other indicators). Besides that, it is possible to play within the channel, observing two rules:
The longer price is moving within the channel, the higher probability that it will leave it;
It is better to play in the direction of the main trend;
Trading range - the prices between the high and the low for a specific time period (day, week, life of the contract).
When a market's price is in a trading range (also called a narrow sideways channel), this is a signal that there isn't much interest in that market right then. This is a trading opportunity you shouldn't ignore. Because traders need time to be convinced that they should put their money into the market, channels are more likely to occur near the bottom of a price move.
When price breaks out of the channel, the price movement will tend to continue in that direction. Set your stop-loss order just beyond the middle of the channel, away from the direction of the breakout. Gaps (described shortly) also help to identify when price is breaking out of a channel, and in which direction the breakout is occurring.
A base is a long trading range that is formed during a period of accumulation, and typically occurs at the bottom portion of the price chart. The longer the consolidation period, the greater the rally after the breakout.
Trading range rule of thumb: The upside or downside breakout of the channel will carry prices in a one-to-one (1:1) ratio. That is, if the trading range is 20 squares wide on the price chart, when price breaks out of the channel it will frequently rise or fall 20 squares. This gives you an idea of a likely price objective for the move.