Articles

Channel Line

In order to draw a channel line in an ascending trend, we need the maximum located between two minimums, through which we have drawn the trial trend line. We shall draw the line parallel to the trend line through the maximum. This line is called the channel line. Then we will draw a new channel line parallel to the trend line through the next maximum. In addition, when the price maximums can be connected via one line, and the line is not parallel to the trend line, it is worthwhile using it all the same. History repeats itself! Moreover, if price has bounced from such a line three times, it is very likely to bounce from it for the fourth time as well. Let us look at the examples of a trend line and a channel line below.

In the first example the channel line drawn parallel to the trend line works quite well. In the second example the lines are not parallel.

When a trend is enclosed in the limits of a clear channel, the trade looks quite simple and attractive. The ascending trend line is used for opening a buying bargain, while the descending trend line is used for opening a selling bargain. At the same time the channel is employed for bargain closing and profit fixation.

The question may arise, whether it is possible to open a bargain from the channel line. It is possible, but you should mind that in this case the trade is carried out against the trend, and the trend is our friend. Only experienced market participants can afford trading in such a way.

Now let us consider some other interesting practical moments. We may receive a preliminary signal about the trend weakness, when the price has not reached the channel line. This example is marked with figure 1 in the picture below. Then the trend line break by the price testifies to the trend change (marked 2). Now we have received all symptoms of a descending trend -- maximums and minimums are lower than the previous ones. In this case, one should stop buying, and at further descending it is required to look for opportunities for selling.

A preliminary signal about the trend strength can be received in the same way, when the price does not reach the trend line. After that the channel line break by the price is confirmed by the signal, indicating the trend acceleration. It is possible to join such a break, with increasing the bargains on the trend.

а) the trend line break testifies the trend change

b) the channel line break indicates the trend acceleration

Note the way the market has demonstrated a preliminary signal about the trend line possible break in Fig. A, when the price has not reached the channel line, and the way the market has warned about the channel line possible break in Fig.B, when the price has not reached the trend line. Technical analysis, the very basis for trade decision made by a trader, is formed from such observations of the price movement dynamics.

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Alex Sabodin.
Pro Finance Group Inc.