How to Trade Channels In Forex?

Channels In Forex Trading

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.

Tunnels or sleeves in FT

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.

Up trend down trend in FT

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.

parallel lines don't touch highs and lows

Here are some examples of channels, on the first one you can see a rising channel.

Example of a rising channel FT

On the second a flat channel or trading range.

Example of a flat channel or trading range FT
And on the third one a descending channel.

Example of 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.

two parallel lines in FT

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.

Channel in FT

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.

Quantity and quality of the other irate criteria FT

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.

Trend lines and channels
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.

exiting and opening channels

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.

Rising 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.

narrow channel and steep slope
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.

Example of how a seemingly well planed trade closes with a loss

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.

Falling channel
Falling channel
Rising channel
Rising channel 

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.

Price breaks downSubjectivity 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.

Moving Average