Forex Channel- If we take the Trend Lines theory a little further and draw a parallel line that points in the direction of uptrend or downtrend, then we get a channel. Are you thinking about TV Channel just like ESPN/ HBO etc? oh NO! Forex Channels is a part of Technical Analysis or you can say, it is a technical tool that helps traders to spot a market environment properly. That means channel can be used to determine good places to BUY or SELL on a currency pair.
As we said earlier, Like any other technical analysis of Forex trade, Forex Channel indicates a buy or sell entry. The bottom and top of the channel indicate the support and resistance of a particular area.
Types of Forex Channels
There are three types of channels:
- Ascending channel (higher highs and higher lows)
- Descending channel (lower highs and lower lows)
- Horizontal channel (ranging)
Ascending channel – simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
Descending channel – simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.
Please be noted that the channel acts as an important support and resistance level. When price reaches the Upper channel level it indicates to take a SELL entry as this level is acting as a Resistance level. On the other hand, if prices hit the LOWER trend line, this may be used as a buying area.
Some Important Tips while drawing Forex Channel:
- When you try to plot a channel, the two Trend Lines need to be parallel to each other.
- Generally, the Bottom Channel indicates (Buy) and Top Channel (sell) zones.
- Like Trend Lines, DO NOT EVER try to fit price in your channel by force. If you try to draw a channel by force, it may not be right and it may be a cause for loss to you.