[LFX]

If you’re new to chart analysis you may be thinking that the array of bars or candles on a price chart looks like the ultimate in randomness. Sometimes that’s true, but more often than not, you’d be surprised how frequently symmetrical formations appear. By symmetrical formations, we mostly mean price channels.

A price channel is nothing more complicated than a series of parallel trend lines that encapsulate price action over a discernible period. channels will form in all time frames, with long-term channels on a daily chart highlighting multiday or multi-week trading ranges, and short-term channels on an hourly chart revealing steady buying or selling during a trading session. Price channels can also form in any direction, from horizontal to steeply sloping up or down and anything in between. The graph below shows several short-term channels and how they can contain prices for extended periods of time.

Drawing parallel channels can help identify potential support and resistance levels
Hourly GBP/USD


The way to identify price channels is through visual inspection, using your eyes and imagination, as well as a fair amount of trial and error. Drawing channels is made much easier by the Copy a Line and Parallel Line functions, which are standard in most charting systems. To begin looking for and drawing potential channels, you need only one trend line to start with: the primary trend line.

If the primary trend line is below the price bars or candles (support), look up at the tops of the price action to see if there is any parallel symmetry to the primary support trend line. If you’re not sure, simply copy the support trend line and drag it to the tops of the price bars to see if it captures the highest highs. If the copied trend line fits neatly onto the tops of the price action, you’ve found yourself a price channel. If the parallel trend line is broken frequently by the price action, there’s no channel to be found.

That said, the parallel side (the upper channel line based on upward-sloping primary trend lines, and the lower channel line for downward-sloping primary trend lines) never behaves quite as neatly as the primary side. For example, during an uptrend most people are looking to buy; that’s why the price action often goes exactly to the primary support line and then bounces higher. However, on rallies during an uptrend, there usually aren’t as many traders looking at the parallel side, and price action frequently exceeds the upper channel line. The same happens with downward-sloping channels, too.

When you’re looking for channels, especially if pries have just changed direction and a new move is just beginning, keep in mind that you may have only one or two price points opposite the primary trend line to connect the parallel channel line. When that happens, go ahead and draw the parallel channel line – it’ll extend into empty space for the time being – but consider it only a tentative channel top or bottom until more price action confirms its validity.

The whole point of looking for and drawing channel lines, of course, is to highlight additional sources of support or resistance. Directional price moves rarely go from Point A to Point B in a straight line. More typically, for example, prices will move higher for a period of time before short-term buying interest fades or encounters heavier selling interest, sending prices back down to the trend-line support. When this pattern repeats itself several times, a channel is formed.

You can use channels as part of your trading strategy to guide both position entry and exit. Short-term traders in particular like to use channels to trade around a core position, for example, selling short on trend-line resistance and buying a portion of the position back if prices drop to channel support. If the channel continues to hold, they’ll resell on gains back toward trend-line resistance, reestablishing their core short position. When channels break, it’s also a sigh that prices are either accelerating in the direction of the trend, as shown by the channel, or that the trend is reversing and prices break out of the channel in the opposite direction.