If we take this trend line theory one step further and draw a
parallel line at the same angle of the uptrend or downtrend, we will have
created a channel. No, we're not talking about ESPN, ABC, or Cartoon Network.
Still, this doesn't mean that you should walk away like it's a
commercial break- channels can be just as exciting to watch as America's Next
Top Model or Entourage!
Channels
are just another tool in technical analysis which
can be used to determine good places to buy or sell. Both the tops and bottoms
of channels represent potential areas of support or resistance.
To create an up (ascending) channel, simply draw a parallel line
at the same angle as an uptrend line and then move that line to position where
it touches the most recent peak. This should be done at the same time you
create the trend line.
To create a down (descending) channel, simply draw a parallel line
at the same angle as the downtrend line and then move that line to a position
where it touches the most recent valley. This should be done at the same time
you create the trend line.
When prices hit the bottom trend line, this may be used as a
buying area. When prices hit the upper trend line, this may be used as a
selling area.
Types
of channels
There are three types of channels:
1. Ascending
channel (higher highs and higher lows)
2. Descending
channel (lower highers and lower lows)
3. Horizontal
channel (ranging)
Important things to remember about trend lines:
·
When constructing a channel, both trend lines must be parallel to each other.
·
Generally, the bottom of channel is considered a buy zone while
the top of channel is considered a sell zone.
·
Like in drawing trend lines, DO NOT EVER force the price to the channels that
you draw! A channel boundary that is sloping at one angle while the
corresponding channel boundary is sloping at another is not correct and could
lead to bad trades.
