If you are reading this article, then I must take into account that you have already understood trend lines. Channel is an advanced version of reading trendlines. It is basically a parallel line drawn at the same angle to the bearish or bullish line. The area within these two lines is then analyzed for checking the highs and lows of a currency pair.
Analyzing the price movement using a channel is highly crucial as it can give you an exact indication about where to open and close the position in the market. In this method, an analysis is done by taking both support and resistance into consideration. The upper trend line is created by joining the resistances, and the lower trendline is created by joining the support. Following is the simple example of a channel:
There are three types of channels used to study the price movement:
- Ascending Channel
- Descending Channel
- Horizontal Channel
An ascending channel is created parallel to the bullish trendline. It should be at the same angle as the bullish line and should be stretched to an end where the line meets the recent highest high.
A descending channel is created parallel to the bearish trendline. It should be at the same angle as the bearish line and should be stretched to an end where the line meets the recent low.
A horizontal channel is created when the price is not making a new high or low and the graph is almost flat.
Remember that the channel should be created at the same time when a trend line is created.
The two lines of a channel should be strictly parallel. Just a single mistake can break the profit opportunity leading to a loss.