At some point in each of our lessons on forex trading, the entirety of a concept comes together. Channels and ranges are at the crux of successful application of basic technical analysis, so we’ll dedicate this lesson to making channels and ranges from support, resistance, and trend lines.
Channels
Channels are made up of two trend lines that create a trading channel where the price of a currency pair bounces between two trend lines, or support and resistance lines.
There is one very important point about channels and ranges in technical analysis: the two lines must be parallel to constitute a trading range. That is, the lines must have similar slope. Take a look at this chart, on which we’ve drawn several channels:
In each of these channels, the price bounces between two trend lines. We drew an uptrend channel, a downtrend channel, and also a sideways channel to show you how channels work. Note that both lines in each channel slope to the same degree.
Reading Channels
Channels should be interpreted as trading zones where the price bounces between two lines. At the top of a channel, forex traders would find value in selling the currency pair. At the bottom, a trader would want to buy the pair.
You should be able to see how profitable a good channel is. If the price bounces consistently between two lines, a trader can profit on the rise to the top of a channel, and each drop back to the bottom of a channel.
Channel Reminders
- Channels are made of parallel lines and nothing else. If the lines do not have the same slope (they don’t have the same angle) then they are not channels. They may be another type of chart pattern, which we’ll get to later.
- Channels can be uptrends, downtrends, or sideways.
- Forex pairs are said to be trending 70% of the time. Many times, these trending patterns are part of a channel.
In the next article, we’ll get to the three ways you can make money by trading with trend lines
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