What are Trend Channels in Forex?

Okay, so now that you know all there is to know about trend lines and candlestick patterns, what if I told you that you can take it one step further?

If you draw a parallel line at the same angle of the uptrend or downtrend, you will have created a trend channel. These parallel trend lines are a technical analysis tool used by many forex traders to identify the trend direction and to clearly see the support and resistance levels within a trend.

Let’s explore this technical indicator and take a closer look at how you can use trading channels in forex trading.

What is a Trend Channel?

A trend channel, also sometimes called a price channel, is a set of parallel trend lines defined by the highs and lows of an asset’s price action. These price channels typically run pretty close to a parallel of each other and are super helpful to Forex traders because they help them see uptrends and downtrends. 

But that’s enough talk. Let’s take a look at what a trend channel looks like in practice.

As you can see in the chart above, an ascending channel can be defined as the upward movement of asset prices in between very accurate parallel lines. By using the upper channel line, a trader typically buys the asset at the bottom trend line and sells the asset at the upper trend line. The same applies to a descending channel, which is the exact opposite of an upper channel line.

Types of Trend Channels and Trend Lines

There are 3 types of trend channels. 

• Ascending channel or upper trend line (higher highs and higher lows)
• Descending channel or lower trend line (lower highs and lower lows)
• Sideways or horizontal channel (ranging market)

Each type of trend channel indicates a different price action sentiment in the market. However, when drawing trending trading channels or horizontal channels, the way you trade the asset works pretty much the same.

In an ascending channel, you will normally buy the asset and use the upper trend line as a profit target. In a descending channel, you will normally short sell the asset and use the lower trend line as a profit target.

In a horizontal channel, you are neutral to the direction of the market. In this case, you buy the asset at the bottom of the channel and sell the asset at the upper level of the channel.

Drawing Trend Channels

So now you understand what is a trend channel and know the types of trend channels, all there is left to do is to learn how to draw trend channels on your charting trading platform. For this demonstration, we use the MT4 charting package.

In the MetaTrader 4 toolbar, click on the draw trend lines (as seen in the image below).

Now, once the parallel trend lines defined, drag this new trend line into position. These new parallel lines that you have drawn in your trading platform are known as the “Channel lines”, and can be used as support and resistance levels in an ascending or descending channel.

Simple, right?

As you can see, this is a bearish trend, so the trend line is plotted above the price action, while the trend channel line is positioned below the price action. In a bullish trend, the trend line is plotted below, while the trend channel line is above the price action. But let’s not make it too complicated. This descending channel shows the high and lows of the asset’s price in a predefined price channel. It can, therefore, help you know when to buy or sell the currency pair and when to identify a channel breakout.

In the example, we can see that when the price breaks above the price channel, the bearish trend is no longer valid and theoretically, you should have taken a long position.

One thing that is important to understand is that trend channels don’t have to be absolutely parallel and it’s even possible that one side of the trend channel is horizontal support or resistance – in such a case, we typically speak of triangles or wedges but more on that in later chapters. 

Let’s take a look at what I mean by that below. 

Do you see what I mean by saying they don’t have to be absolutely perfect? Do not only look for textbook price patterns. You can even a sideways market by using trend channels and by drawing two parallel trend lines.

Speaking of the sideways market, now I want to show you how to draw channel trading lines in a ranging market.

Let’s go back to the MT4, but now, click on the horizontal line next to the trend lines button.

As soon as you have a ranging trading area, you simply need to draw a horizontal channel, meaning a straight line above the highs and another straight line below the lows.

With the new channel drawn, you can see two horizontal lines that can be used as support and resistance levels. In case the prices of the forex pair reach the upper line, it is an entry signal to sell (or short position sell) the asset. Otherwise, when prices trade near the bottom line, you assume the price will bounce back and trade in the opposite direction, and therefore, you pair the pair.

Final Thoughts – How to Spot and Trade Forex Trend Channels?

The bottom line – using channel trading systems in the forex market is a great way to find price trends and identify entry and exit points. After all, the price movement of financial assets is not always moving in one direction as buyers and sellers are in a constant never-ending battle. Instead, forex markets usually move in sideways channels. 

To spot a trend channel, you first need to find major swing highs and lows in the price action. Then, draw a trend channel line in one of the trend channels we mentioned above – ascending channel, descending channel, or ranging horizontal channel. From this point, buy the dips and sell the highs – the best formula to trade any market…