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Part III. Channels

Channels - Forex School

Commander in Pips:
 Ok, let’s continue to talk about different lines – today this will be channels.

Pipruit: And what is your favorite one?​

Commander in Pips: Heh, I like Discovery, but we will talk about quite another type of channel…

Draw channels - Forex School

Commander in Pips:
 It is very simple to draw a channel – we already know how to draw trend lines. So, to draw a channel you should draw a parallel line with the same angle as an initial trend line. If we talk about an uptrend that is based on lows, then you should draw the parallel line by highs. For downtrend, that is based on highs, the parallel line will be based on lows.

There are a couple of rules that could be allied to draw a channel:

1. To draw an Up Channel, the market has to form higher highs and higher lows with the same speed;

2. To draw a Down Channel, the market has to form lower highs and lower lows with the same speed;

3. And as with simple trend lines – you should not force the lines of channel if they do not fit to the market action. If market creates highs and lows and lines have different angle – do not try to fit them to a parallel movement. This is just not the channel!

Channels also are a tool of technical analysis and could be used for estimation of possible areas to Buy or Sell, because Channel lines have a quality of support and resistance similar to simple trend lines.

Channels have the same properties as trend lines, so if you’ve forgotten some – reread the two previous lessons.
As with trend lines, there are could be three types of channels:

1. Ascending or up channel

2. Descending or down channel

3. Sideways channel

UP CHANNEL

Here in the #1 Chart is an example of anascending channel:

Up Channel - Forex School
You can see that the difference between two nearest tops and bottoms are almost the same – the market is forming new highs and new lows with equal amounts of price movement to the upside. Due to this movement, lines that link tops and bottoms are parallel, i.e. have the same speed and angle.

Now I suppose you understand what “Higher highs and Higher Lows” term means. In general to build an up channel:

1. Draw an uptrend, according to rules, that we’ve pointed out in the previous lesson (trend lines);

2. Clone it – draw another one with the same angle (parallel), adjust it’s length to the length of potential channel;

3. Drag it to the most recent high;

4. If this is really an ascending channel – then all previous highs should lay with solid accuracy on dragged line (see chart #1 – although there is some divergence of tops from the line – still they are very close to it, as are the lows).

5. Don’t fit it forcedly to market action!

DOWN CHANNEL

Here on the #2 Chart is an example of descending channel:

Descending Channel - Forex School
Here again you can see that difference between two nearest tops and bottoms are almost the same – market is forming new highs and new lows with equal amount of price move to the downside. Due to this moment lines that link tops and bottoms are parallel, i.e. have the same speed and angle.

Now I suppose you understand what “Lower highs and Lower Lows” term means. Here is an algorithm how to build down channel:

1. Draw a downtrend, according to rules, that we’ve pointed in the previous lesson (trend lines);

2. Clone it – draw another one with the same angle (parallel), adjust its length to the length of potential channel;

3. Drag it to most recent low;

4. If this is really descending channel – then all previous lows should lay with solid accuracy on dragged line (see chart #2).


5. Don’t fit it forcedly to market action!

SIDEWAYS CHANNEL

Also they call it “Consolidation area” or “Trading range”. To illustrate them I will use a 60-min AUD/USD chart:

Sideway channels - Forex School
As you can see, any properties of support/resistance and trend lines could be applied to the lines of any channel – upward, downward or sideways. Here is an excellent example on #3, because here you can see the same movements that we’ve discussed with support/resistance – the importance of Close price, possible breakout failure patterns, aka Wash & Rinse (stop licking), as a warning about a possible move in the opposite direction – you can take a look at all of them here.

The feature of the sideway channels is that there is no difference in angle between nearest tops and bottoms – market is forming new highs and new lows almost at the same level.

Here is an algorithm how to build sideways channel:

1. Draw any sideways trend first – you may start as from tops as from bottoms;

2. Clone it – draw another one (parallel), adjust it length to the length of potential channel

3. Drag it to most recent low or high - depending on from which sideways trend you’ve started;

4. If this is really channel – then all previous lows/highs should lay with solid accuracy on dragged line (see chart #3).

5. Don’t fit it forcedly to market action!

Special properties of channels:

1. When you draw a channel – lines have to be parallel to each other;

2. In general, bottom line of the channel is treated as support while upper line – as resistance. Although there is an approach exists that tells that you may buy from lower border of the channel and sell from upper border we do not recommend make trades purely on any lines - trend lines, support/resistance or channels. Our approach – is to use them as a part of the overall context of a particular trade. How to do that - you will learn later on in our school.

3. And - Don’t fit it forcedly to market action!

Final notes about the channels

In fact, lines of any channel have similar properties as trend lines and support/resistance lines although they have significant difference in drawing rules. I suggest that you should reread the rules that we’ve discussed in support/resistance part and trend lines part. All of them are applicable to a channel’s lines as well. This fact we’ve shown on the #3 chart. That’s important.

And now let’s talk about how all these lines could be traded…

Pipruit: Finally, I’ll see the real market…

Comments

Aldo Colombo
7 years ago,
Registered user
One question: when you draw an upward channel, it's a long one in my case, so there are 4 or more highs aproximately on the same line, and 4 lows aproximately on the same line. But there makes some difference in angle wether you choose one or other point to draw the channel, which in turn leads to considerable difference at the end of the channel. I understand that one should choose the points that visually fit better the price action inside the channel. Still there's a case now where following these rules, I can draw two different channels that look very similar (one of them fits better at the beginning, and the other fits better near the end). Worth noting, though, one of them is drawn first following the highs and then cloning it to fit the bottoms; while the other channel is drawn first following the LOWS and then cloning it to fit the highs. Is there one "more" correct way than the other for UPward channels? Which one in principle should prevail?
Sive Morten
7 years ago,
Registered user
> One question: when you draw an upward channel, it's a long one in my case, so there are 4 or more highs aproximately on the same line, and 4 lows aproximately on the same line. But there makes some di..

Hi Aldo,
Commonly the most recent price action is more important than elder one. So, it is better to look at most recent picks and bottoms first and then assess how previous ones correspond with them.

But what is more important, I suggest you to read Tom DeMark book "Technical Analysis is new scienсe". There he explains approach how to choose correct points to draw trend lines, channels and so on. The feature of DeMark book - pure precise approach to some spheres of technical analysis, that previously was, say, a bit "personal". One of this topics is what you've mentioned - how to choose points for trend lines.
I do not know will you like it or not, but this books is rather unique, and it may be great help to those who tends to single-valued approach to some flexible topics of Technical analysis.
In general, his approach is based on gradation, ranking of lows/highs, depending on how much bars to the left and right, that have greater low/lower high. The more bars are - the more significant extreme. This leads to the point, that you can have some different trendlines of different significanty.
Hamza Samiullah
2 years ago,
Registered user
Nice work...

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