In the previous lesson, we discussed how to draw trend lines - a fundamental tool for technical analysis. In this lesson, we'll be taking our knowledge of trend lines and applying it to identify trend channels.
Trend channels, also known as price channels, are symmetrical patterns on the price chart that appear between two parallel trend lines. They can be used to visualize price patterns and define them as upward, downward, or sideways trending.
Lesson Overview
- Trend channels are created when the upper and lower trendlines appear parallel in the price chart
- Trend channels can move upward, downward, or sideways
- Trend channels can signal a break in the price trend
Significance of Trend Channels
It is important to identify trend channels because these signal the forces (supply and demand) that affect the price of a currency.
Basic supply and demand theory tell us that the dominance of one force will propel the price channel’s trending direction. If we can detect trend channel patterns, we get a better sense of the supply and demand movements in the market.
A trend channel with a negative slope is considered bearish, while those with a positive slope are considered bullish.
When the prices hit the lower trend line, this can indicate a buy.
Meanwhile, if the prices hit the upper trend line, this can indicate a sell.
Trend Channel Movements
There are three types of channel movements.
| Type of Movement | Indication | Trend | |
| 1 | Ascending channel or rising channel | Higher highs and higher lows | Bullish |
| 2 | Descending channel or falling channel | Lower highs and lower lows | Bearish |
| 3 | Horizontal channel | Ranging or barely moving | Consolidation |
How to Identify Trend Channels
A trend channel has two major components: the lower trendline and the upper trendline.
Let's do a quick review! A trend line is a line that connects significant price points over a defined period of time on the price chart. We consider price points to be "significant" if they are the highest highs or lowest lows on the chart.
Related: TradersUnited - What Are Support and Resistance Levels in Forex?
The lower trendline is drawn along support levels, or the lowest point before the price goes up.
The upper trendline is drawn along resistance levels, or the highest price point before it starts to go down.
Let’s try it on an example below!
Let’s say this is the price chart for USD/AUD for this week.
Let’s draw the lower trend line by identifying the lowest points (in orange) and the upper trend line by identifying the highest points (in purple).
We can see the two trend lines are parallel with each other. This is a trend channel in an uptrend.
A trend channel can exist multiple times and in different timeframes in a price chart.
But remember! This is just an example. Some beginners might make the mistake of looking for textbook price patterns (like the one we used in the example), where the prices seem to fit perfectly into parallels.
Forex trading is extremely volatile. It’s very rare for price action to fit within two perfectly parallel trend lines.
Trend channels: When to buy, sell or hold?
Traders can benefit from identifying price channels, if done correctly. To maximize your gains, you can consider the following:
During an uptrend
When the trend channel ascends, this could indicate a surge in price. Traders can consider selling their pair when it hits the upper trendline.
During a downtrend
Traders can take a long position once the price hits the lower trendline to maximize profit.
Great! Now we know about trend lines, trend channels, and how to maximize these tools to predict the best outcomes.
In the next lesson, we’ll learn about trading support and resistance.
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