A trading channel or Forex channel is a primary method of technical analysis drawn as a pair of parallel lines that resembles a “corridor” or a “channel,” as its name states. These channels are used by analysts to determine an estimated area of stability within the fluctuations of an asset’s approximate price range.
Creation of a Channel:
Visually, the trading channel is composed of two parallel trend lines consisting of a Support line, made from crucial low points on the chart, and a Resistance line that is made from crucial high points on the chart.
- A channel in an uptrend could indicate that demand is more significant than its supply. However, a break below the lower trend line (commonly seen with certain deviations) can be a sign of the channel breaking and should be considered as a signal to sell.
- A channel in a downtrend could indicate that supply is greater than its demand. However, a break above the upper trend line (commonly seen with certain deviations) can be a sign of the channel breaking and should be considered as a signal to buy.
- In general, if a trend line does not break the boundary of the channel wall, the trend would continue to follow its current direction in the market.