TRADING IN PRICE CHANNELS

2023年8月18日

Price spends most of its time in trading ranges. On the chart, this results in the formation of a horizontal, ascending or descending trading channel. Trading channels are one of the most common and important chart patterns. Indeed, in most cases, price tends to consolidate in a limited range, which is a manifestation of buying activity by market participants.

What is a Trading Channel?
A trading channel, whether upward or downward, is simply the range in which price moves. It creates areas of resistance and support in the market where buy and sell orders cause a rebound to the center of the range itself. Building a trading channel is very simple. Just draw a trend line, then project a parallel one. Once a trading channel is formed, you can enter the market whenever price touches one of the channel boundaries. This approach works best inside horizontal trading channels. If you are in an ascending or descending trading channel, I suggest you only trade in the direction of the main trend. How to use trading channels to determine the best entry points into the market? Let's discuss the subtleties of this trading style. We will talk about how to build a trading channel, what are the pros and cons of trading in these channels.

The Idea of Trading in Price Channels
The price of a pair on the currency market fluctuates within a certain corridor, which can be represented as a channel. Moving price in the channel is the main principle on which all channel trading strategies are built. Trading in the price channel brings profit in case of a clear definition of the channel in which the price moves. For this purpose, a certain timeframe is taken, and on it the levels, to which the price reached but did not cross them, are determined. These levels are the upper and lower boundaries of the corridor. And herein lies the main problem for many traders - the correct building of the price channel. In fact, a regular chart building is enough for trading, and a regular chart corridor is already the simplest trading strategy that does not require additional tools for confirmation. Nevertheless, many traders find it necessary to use a variety of ways to confirm the signal. These can be candlestick patterns, various level indicators, divergences, etc.

Two Situations Are Considered In Trading In Channels:

price has broken the channel border;
price did not break the channel border.

At the same time, each strategy has its own breakout criteria and its own rules for opening positions. In addition, the type of channel used for trading plays a very important role. The most common types of channels are ascending and descending channels.

The Advantages Of Including Channels In Your Trading Arsenal:
- low trading risks;
- simple rules, understanding of which will not be a problem for a beginner;
- high profitability.

However, like any other method, the trading in the channels requires clear adherence to the rules of opening positions and compliance with money management.

There Are A Number Of Key Points To Keep In Mind When Trading In Channels:

- the best timeframes for trading are M30 and higher;
- positions are opened at bounce from the borders inside the channel;
- the channel is built in the direction of the trend: upward - by two minimums and one maximum, downward - vice versa;
- a position is opened only after the price reaches the channel boundary;
- it is allowed to place a pending order outside the channel in case of its breakout.

In many cases, the effectiveness of trading signals in the trading channels depends on the stability of the channel. If there are signs of a trend change or the end of the channel, it is better not to trade. If the price breaks the channel border and goes outside of it, in most cases, the price movement will be approximately equal to the width of the previous corridor. This gives the trader an opportunity to plan and open a trade in time. The efficiency of trading in channels increases if you use oscillators, with the help of which you can determine price reversals. As well as the validity of the breakdown of the corridor boundaries.

Some examples:
One recent example is gold. Gold is in a descending channel. And it was possible to sell when the price reached the upper border of the descending channel. The upper border of the channel coincided with resistance, which was a double confirmation.


Let's also focus on the oil. The price has formed a beautiful channel. The price bounced from round levels and from the channel border. In the article about demand and supply I mentioned that the price is at the supply zone and it can bounce from the zone and the price did go down breaking the ascending channel which can be a sign of a trend reversal.


On the New Zealand dollar, we had two beautiful selling opportunities. Here too, as in gold, the channel border coincides with resistance, which gives additional confidence in the trade.