May 13, 2021, | AtoZ Markets – In forex trading, there is a form of technical analysis called the trend line. Trend lines are ubiquitous but underutilized because they can be challenging to draw. But if we draw them correctly, then they can offer a hundred percent precision.
Taking the trend lines to the next level
Let us say that we drew another parallel line with the same angle as the downtrend or the uptrend. This action will create a channel. These channels are also known as price channels or trend channels. These are also tools in technical analysis that help a trader to spot great buy and sell opportunities.
The upper trend lines act as resistance, while the lower trend lines act as the support. It only means that the channel’s tops or bottoms have the potential to be areas of support and resistance. Trend channels may either have a negative or positive slope. We consider negative or downward slopes bearish, while the positive or upward slopes are bullish.
How do we create an up or down channel?
The channels that we create can either be going up or down. Let us say that you want to create a channel that ascends or goes up; then, you should draw a parallel line with the same angle as the uptrend line. You also need to position this parallel line where it can touch the most updated peak. These actions should all be simultaneous when creating the trend line.
Furthermore, you can also create a channel that goes in the opposite direction — a channel that descends or goes down. To make this, you should draw a parallel line and with the same angle as the downtrend line. You should also locate this line where it reaches the most recent valley. Again, these actions should all be simultaneous when creating the trend line.
If you will notice, creating both of the channels are pretty similar. The only difference is the fact that they are the total opposite of each other. If the price reaches the lower trend line, then you can use this as a buying area. On the other hand, if the price reaches the upper trend line, then you can use this as a selling area.
Naming the different types of trend channels
Trend channels are further subdivided into three types. We have the ascending channel (also known as the higher highs), the descending channel (also known as the lower highs and lower lows), and the horizontal channel (also known as the ranging). If you encounter the term “rising channel,” this means ascending channel. The term “falling channel” is the same as descending channel.
Points to review
It is important to double-check whether the trend lines are parallel when constructing trend channels. The trend channel’s bottom is a buy area while its top is a sell area. It is important not to force the price on the channels.
If a channel boundary slopes at one angle and the corresponding channel boundary does not have the same slope, this is not a channel but a triangle. As a trader, you should also look for price patterns outside of the textbook to not miss significant clues and information.