The channel consists of 2 parallel lines and there are 3 types, namely up, down, and sideways channels. This is a technical analysis tool to determine entry levels (buy or sell).
Channels in forex is a technical analysis tool that is often used mainly to determine the entry-level (Buy or Sell).
The channel consists of two parallel lines. The top line shows the potential area as Resistance, while the bottom line shows the potential area of Support.
Judging from the shape, there are three types of channels, namely:
- Up Channel (Ascending Channel), which is a channel that is formed when price movements are in an uptrend.
- Down Channel (Descending Channel), which is a channel that is formed when price movements are in a downtrend.
- Sideways Channel (Horizontal Channel), which is a channel that is formed when price movements are sideways (ranging).
How to Create Channels in MetaTrader
The facility to draw channels is usually already available on the trading platforms provided by the broker, including the Metatrader platform. On the Metatrader platform, the channel appears as one of the insert options as shown in the orange circle below.
Trading platforms can provide more than one type of channel to draw. However, the simplest channel as shown in the picture of Down Channel, Up Channel, and Sideways above, is obtained by using Linear Regression Channel.
To apply a channel to the price chart, you simply click on the Linear Regression option, then click on the high and low levels that can be found on the chart, subject to the following conditions:
- Up Channel: If the price moves in an uptrend, that is, when the price forms low levels that are higher than the previous low (higher lows), and high levels that are higher than the previous high (higher highs), then draw a line connecting at least two Low levels, then draw a parallel line that is parallel (with the same angle) and adjust its position so that it touches at least one high level.
- Down Channel: When the price moves in a downtrend or forms high levels that are lower than the previous high (lower highs), and low levels that are lower than the previous low (lower lows), then draw a line connecting at least two high levels, Then make a parallel line that is parallel and adjust its position so that it touches at least one low level.
- To create a Horizontal Channel, it is enough to draw lines that connect at least two low levels and two high levels.
If there is an error in setting high and low, you can move it later until you reach a channel that meets the requirements and can be guessed by its shape.
What to Pay Attention to When Creating a Channel
There’s no set rule for creating a channel, but the steeper the angle of the channel you create, the less reliable or valid it will be.
This is because the pattern of price movements that go up or down sharply will be prone to a break or a break in the channel you created.
The more often the channel you create is tested or fails to penetrate price movements, the more valid and reliable it will be.
Resistance and Support lines on a channel do not indicate a definite Resistance or Support level but are an area (range) of resistance or support.
Also read: Understanding Time Frames in Forex
Example of Trading with Channels in Forex
Trading with channels is usually done with Sell entry in the Resistance area and Buy in the Support area, as well as a tight stop level to anticipate if the price breaks the channel.
The target level (limit) is usually determined in the opposite area, near Support or Resistance. An example is shown in the image above.
As confirmation before entry, you can use technical indicators. For example the Moving Averages indicator or oscillator indicators such as the RSI, the Stochastics indicator, and others.
In addition, you can also look for confirmation by investigating what candlestick formations are formed around the Resistance or Support area.
It should be understood that price movements in the market are uncertain. Even though when the channel is formed, there is a tendency for the price to move up and down in it, but it is not impossible for the price to move out of the channel.
Therefore, after studying the discussion of trading with channels in this forex, it is better to examine various other discussions that can be used as confirmators.