So, what is a channel?
As the name suggests, channels aka tunnels or sleeves are parallel trend lines that surround a rising or falling trend at the angle and width that not only captures the overall slope of the trend like a single trend line but also encompasses most of all the price range.
And the price range is most of the higher highs and higher lows that defined an uptrend and lower highs and lower lows that define a downtrend.
Again, the goal is to best describe the overall slope and price range. So don’t worry if your parallel lines don’t touch all of the highs and lows or don’t encompass the entire trading range.
Here are some examples of channels, on the first one you can see a rising channel.
On the second a flat channel or trading range.
And on the third one a descending channel.
There are two big advantages of channels over single trend lines. We prefer using channels over simple trend lines, whenever the price range of a rising or falling trend can be captured by two parallel lines because channels provide more useful information.
1.Better Guidance for Entry/Exit Points
While single trend lines only tell us about the slope of the trend, the upper and lower trend lines of channels also tell us about THE PRESENT AND POSSIBLE FUTURE TRADING RANGE.
In other words, those upper and lower lines may help us find the best entry and exit points for taking new long positions we might try to buy near the lower channel line. Which is a kind of support and sell near the upper channel line which serves as a kind of resistance.
Whether or not we enter at the lower line and exit at the upper line would, of course, depend on the quantity and of the other Irate criteria we find near these lines. For short positions, we do the opposite and consider entries near the upper line and exits near the lower line.
Again, the final decision would depend on the quality and quantity of the other array criteria we see near these lines. Of course, there’s a lot more to know about entering and exiting positions than that.
Beware of using channel lines to trade against the trend.
When you use the upper and lower channel as entry and exit points it’s tempting to try to play both side of the trading range by going long near the lower line then exiting near the upper line and opening a new short position there with the goal of closing that position when the price returns to the lower line.
However, trading both the up and down moves can be much harder If you’re trading against the trend. That is trying to short in rising channels or go long and descending channels.
As a general rule, don’t do it unless you have both of the following conditions:
- The slope of the trend and channels is very mild and
- The channel is wide
If the slope is steep or the channel is narrow, you risk getting resistance and the need to exit too quickly to give price enough time to move in your favor.
Here is an example of how a seemingly well-planned trade closes with a loss because when you trade against the trend of a steep and a narrow channel, resistance moves closer with each candle and the trade doesn’t have enough time to move in your favor.
2. Channels Offer Stronger Trend Reversal Signals When the Price Breaks out of the Channels in the Opposite Direction
The other big advantage of channels over single trend lines is that channels offer stronger trend reversal signals when the price breaks out of the channels in the opposite direction.
In other words, when price breaks out above the upper line of a falling channel or makes a sustained move below the lower line of a rising channel. That’s a stronger signal of a trend is reversal than a breach of a simple trendline.
That’s because it takes a stronger change in sentiment about an asset to reverse past and entire trading range that is, of course, wider than a single tread line.
For example, when price breaks down below a rising channel, it needed enough selling pressure to move all the way down from the upper channel line to the lower line.
Subjectivity is the big flaw of both simple trend lines and channels.
Even though trend lines are useful tools, their construction often requires a degree of subjective judgment. Different traders will draw them a bit differently and thus won’t see support and resistance in the exact same place.
That’s one reason why we view support and resistance from these trend lines as areas or bands of support and resistance, rather than is precise lines.
For more objectively drawn kind of trend line that will look the same for all traders, and this better tells you with the crowd views as support and resistance, we use a different type of trend line, called a moving average.