Price Channels: How to Trade with Price Channels

When Price Channels are placed on a chart, they identify the high and the low price at which the pair traded over a specified period of time. The Channels on the Daily chart below are set to 20 periods so they represent the high and the low at which the pair traded over the previous 20 days.

As such, they can be used quite effectively to visually identify levels of Support and Resistance on a chart. Also, the channels are often used by "breakout" traders to identify entry levels.

Take a look at the example below of Price Channels on a chart&

Price_Channels_How_to_Trade_with_Price_Channels_body_cadjpy_dnc.png, Price Channels:  How to Trade with Price Channels

The lower channel line represents support while the upper channel line represents resistance.

As mentioned above, these channels can be put to good use by traders who employ a "breakout" trading strategy.

A breakout strategy consists of buying a pair that breaks above resistance in an uptrend or selling a pair that breaks below support in a downtrend. Since the price traded above the previous high or below the previous low, the pair is said to have "broken out" beyond its previous levels. When the breakout occurs, this can be taken as an entry signal as the potential exists for price to continue to move in that direction for a period of time.

Another effective way that the channels can be used is to identify a strong uptrend or downtrend. For example, take note of the red candles in the lower right hand corner of the chart. As they are "hugging" the lower channel line as they move lower, we have another visual cue that price is moving lower. If the candles were hugging the upper channel line in the same fashion, we would be using the channels to identify an uptrend.

Additional Resources:

Support and Resistance

--- Written by Richard Krivo, Trading Instructor

To contact Richard, e-mail rkrivo@fxcm.com.

To be added to Richard's e-mail distribution list, send an e-mail with subject line "Distribution List" to rkrivo@fxcm.com.

Related Articles
  1. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  2. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  3. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  4. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  5. Investing

    Financial News Comparison: Bloomberg Vs. Reuters

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  6. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
  7. Forex Education

    The Top Uses For P2P Currency Exchange

    Peer-to-peer (P2P) currency exchange networks offer a viable and cheaper alternative for buying and selling currencies.
  8. Forex

    Steps To Open An Offshore Forex Account

    Here is a simple breakdown of how to open an offshore forex account for US-based users, including legal requirements.
  9. Entrepreneurship

    Top Forex Trading Apps

    A brief overview of the top apps that help forex traders with on time information, charts and more.
  10. Investing Basics

    The Risks Of Buying Bitcoin

    Virtual currency is probably here to stay, but what about Bitcoin specifically? Does it have a first-to-market advantage? What are the risks involved?
RELATED TERMS
  1. No results found.

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!