CHANNELS

One of the more common features related to trend lines is the channel. In the context of technical analysis, a channel is defined as the area between two parallel trendlines and is often taken as a measure of a trading range. The upper trendline connects price peaks (highs) or closes, and the lower trendline connects lows or closes.

It is quite common for the peaks and troughs produced as the market establishes a trend to arrive in a regular sequence with trend moves and corrections being of similar magnitude. This may result in a channel.

To create a channel, follow these four steps:

1. Locate a relative high and a relative low in the past from which to begin the channel.
2. Locate another subsequent high and low.
3. Draw two trend lines – one connecting the two highs, and one connecting the two lows. Note that these two lines should be near parallel.
4. The trend line runs through the troughs and a resistance line through the peaks. When these lines are parallel, a channel is the result. More contact points enhance the reliability of the channel.

Let’s look at the channel evolution. In this example, an initial channel supported by S1 fails when down-trend R is confirmed.

As soon as R is drawn, P can be added as a prospective channel base. In this example, it is later confirmed.

There is a possibility that a channel may form within an existing channel, this can be documented in the same way.

Channels provide one of the most accurate methods from which to trade in any market. By “encasing” an equities price movement into two parallel trend lines, this simple chart can provide the exact points from which to buy and sell, create stop-loss and take-profit points, check channel strength and even estimate how long the trade will take. This technique is a valuable asset to any trader.