Price Channels A Classic Tool with High Profitability and Ideal Risk Management
Imagine dear reader that price channels are considered one of the simplest and most profitable technical tools in financial markets. They do not require complex indicators or advanced programs but are based on a very clear principle which is sloping support and resistance. What makes price channels unique is that they provide traders with clear entry points small stop losses and large targets which is exactly what any professional or beginner trader looks for.
Price channels appear repeatedly and consistently in the markets whether on lower timeframes such as the one minute and five minute or on higher timeframes such as the daily and weekly. Therefore they are a suitable tool for all trading styles scalping swing trading and even medium term investing.
What Are Price Channels
A price channel simply consists of two parallel lines representing support and resistance areas. Prices move between these two lines upward and downward within a clear path where price reacts from one line and moves toward the other.
A channel is formed and confirmed by at least four main points two highs and two lows. After these points are established two parallel lines can be drawn to guide price movement.
Price channels are divided into two main types
- Ascending Channel where lows are rising and highs are also rising
- Descending Channel where highs are falling and lows are also falling
Ascending Price Channels
An ascending channel is formed by four main points: Low 1 High 2 Low 3 and High 4. After drawing the channel the fifth point can be treated as a buying opportunity. The first target is usually the upper boundary of the channel or the previous high which is point 4.
When the channel is broken and price retests the ascending trendline a sell trade can be taken. The first target in this case is the distance between the lower and upper boundaries of the channel which is known as the Minimum Target.
Practical Example
An ascending channel formed by 8 points produced 3 clear trades
• Two buy trades at the lower boundary of the channel
• One sell trade after the trendline was broken and retested
The targets were the upper boundary for the buy trades and the first low facing price for the sell trade
Descending Price Channels
Descending channels are just as important as ascending ones. In an example of a descending channel formed by 9 points three sell opportunities appeared at points 5 7 and 9. The targets were clear which was the first low facing price.
In some cases price does not reach the lower boundary directly and this is where the importance of risk management and commitment to the initial target appears. As for the counter trend trade it comes when price breaks the descending trendline to the upside where we enter a buy trade and the target is the distance between the upper and lower boundaries of the channel which is the Minimum Target.
Important Tips
- Confirmation by Points
Do not draw price channels randomly. A valid channel must be formed by at least two lows and two highs to be considered reliable. - Risk Management
Although price channels are very attractive you must always place a stop loss just beyond the lower or upper boundary of the channel. - Trade with the Trend
Ascending channels offer primary buying opportunities while descending channels offer primary selling opportunities. - Watch for False Breakouts
The market sometimes breaks the channel and quickly returns inside it. For this reason you should wait for candle close confirmation and a retest before making a decision. - Combine with Other Tools
Additional tools such as Fibonacci levels or volume analysis can be used to strengthen the analysis. - Discipline
Price channels are not a magic tool but they are highly effective when used within a clear and disciplined trading plan.
Price channels are one of the classic tools that have proven their strength and effectiveness over time. Their main advantage is that they are simple clear and suitable for all experience levels. They also provide trades with tight stop losses and large targets and most importantly they teach the trader discipline by trading based on a structured plan rather than randomness.
If you are a beginner trader price channels will be your first gateway to understanding the market. And if you are an experienced technical analyst you already know that price channels are an essential tool in any professional analysis
