According to technical analysis, the progress of prices through a certain range brings with it some formations. A price channel is one of them. It is a tool that provides important information to the investor in terms of creating a risk-free position. The instrument, which consists of two relative straights, shows in which range the price moves. Now let’s take a look at what you need to know about a price channel.
What is a Price Channel?
A financial instrument’s price bounded between two parallel lines indicates a channel on the chart. Usually, there is a horizontal, ascending or descending channel depending on the direction of the trend.
If a line connecting the relative high and low points can be drawn parallel to the trend line, it is called a price channel.
It is accepted that when a second line is drawn parallel to the trend line, the price will be constrained between the two lines.
Technical analysts often use it to measure the momentum and direction of an instrument’s price action. It is also preferred to determine the trading range.
The price of an instrument is determined by supply and demand. Changes in these cause fluctuations. As a result, upward, downward or horizontal price channels are formed.
The duration of the supply and demand effects can result in a long channel. The dominance of power determines the direction of the channel.
Trend lines are drawn below price bars on an uptrend and above them on a downtrend. These lines also determine the direction of the channel.
How to Draw a Price Channel?
Price channels, defined as a range in which the price will move, are easily drawn with the relevant tools on the platforms where forex and VIOP transactions are made.
The channel drawing tools on the platform help you with this. An automatic channel will be created when you move the cursor to the point where the channel is thought to start and pull it towards the direction of progress.
Then adjustments should be made to this channel. When you adjust the channel created automatically by the program according to the price levels of the instrument, you will see the correct channel.
At the same time, programs that offer analysis on price charts also facilitate this drawing. The logic of the channel is to draw another line parallel to the trend line.
The trendline is drawn below the price curve on an uptrend by joining at least 2 lows. The channel is the line that passes through the highest levels parallel to this line.
The segment formed between these two lines gives the trading range. The price is considered to move in this range. Transactions are made accordingly.
Another thing you should know about drawing is that several different channels can be created in a graph. So when you get a long channel, smaller intervals may occur in it.
How It Works?
Price channels provide various information to the investor when opening a position. It is accepted that the price will return to the channel when it reaches the limits. This can also be seen as an opportunity.
In other words, the most basic benefit of this formation is the knowledge that the price will move within this range. E.g; The price that reaches the upper or lower limit is expected to return.
If the price goes out of the range, it can show drastic moves. This situation can create a position opportunity when evaluated correctly.
A successfully created price channel is important for the position. You can select positions that can be taken according to the slope of the graph. Then you should examine the correct entry and exit points.
The general opinion about the formation is to open a position in the opposite direction at the borders. However, for this, you should also know the trend.
In this context, we can list the things you need to know for less risky positions as follows:
It is possible to buy when the price reaches the lower limit in an ascending channel and sell when it reaches the upper limit. However, buying at the lower limit in this channel gives more successful results.
The price will naturally move upwards within the channel in an uptrend. For this reason, it is preferred to buy at the lower limit instead of selling at the upper limit.
In a descending channel, it makes sense to sell when the price reaches the upper limit. Since there is a downward trend, the price will generally move downwards.
The price naturally moves down within the channel in a downtrend. For this reason, it is preferable to sell at the top instead of buying at the bottom.
SEE MORE: Forex Technical Analysis 101