Understanding price channels
Price channels are very relative to technical analysis and technical traders. Price channels are used mainly for two things: trend channel identification and measurement of the price action of the asset's momentum and direction. We can encounter them when an asset or security price develops a two-parallel line boundary. The channels are called differently depending on the trend's direction. They can be called:
- Horizontal
- Ascending
- Descending
Tell me more about price channels
There is a price channel when the security's price gets beat up by supply and demand forces. It can be trending or sideways, upwards, or downwards. The price channel becomes more extended due to these forces, and the dominant one dictates the direction. They may appear in several time frames. It can be applicable for all types of instruments and securities like futures, stocks, ETFs, mutual funds, etc.
The most common sign that a price channel is formed is when a security's price action develops highs and lows set that follows a connectable pattern using two parallel lines. It is something that technical traders are monitoring since it helps them make better and sound trading decisions.
Drawing the price channels
There are terms called lower trend lines and upper trend lines. Lower trend lines are drawn when the price increases, while the upper trend line gets drawn if the price decreases. The price channel's trend direction depends on how steep is the incline and decline.
- Ascending price channels. The trend line boundaries have a positive slope that tells us that the price trends more with every price change.
- Downward price channels. The trend line boundaries have negative slopes that tell us that the price trends lower with every price change.
How relevant are price channels in trading?
The price channel's two lines are the support and resistance that signals good trading opportunities. They are also beneficial for people who want to know where breakouts - security breaching the upper or lower trend line. Aside from that, price channels allow traders to trade within them. For instance, the trader can sell if the price goes over the channel's upper trend line or buy if the price goes over the lower trend line.
What are the benefits?
Securities that follow a price channel path give investors the potential to bring home returns regardless if it is using a long or short position. Hence, it would be incredibly beneficial if a trader knows how to identify a price channel correctly.
However, as others say, money does not grow on trees. Money is something earned, and best spent when you worked hard for it. So, traders must first know how to establish a security buy position at the best levels to see returns. An identified channel will most likely mean that the security will reverse and increase while the price is on its way to the channel's lower bound. From there, the trader can make a buy position at a considerably lower price.
What to do if the price channel is upward or downward
Let us assume that we are on an upward trending price channel. A trader feels bullish about his holdings going up and is anticipated to breakout. This will most likely continue to a skyrocketing price. If the security looks like it will remain within the price channel, the trader can take a short position to become more profitable.
If
the situation is in a downward trending price channel, the trader can make a short position at the upper bound
then another deeper short position when the breakout is confirmed. The trader
can oppose the dominant trend while taking a long position from the lower bound
with the anticipation that the price action will adhere to the price channel
boundaries developed and go back.
