Stocks, currencies, commodities, and cryptocurrency markets are complex systems influenced by many factors. No one can predict the movements of quotes, especially short-term ones, with absolute accuracy, which creates risks in trading and investing. Luckily as traders, we have tools, charts, and techniques, like the price channel pattern strategy, that allow us to produce more profitable trading positions.
In this ultimate guide, we will explain the price channel pattern strategy, how do we draw it, and how you can obtain profitable trades with it?
- What is the Price Channel Pattern?
- How Do You Draw a Price Channel Pattern?
- How Do You Trade With the Price Channel Pattern Strategy?
- What Is the Price Channel Indicator?
- Should You Use It as a Beginner?
Interact with the underlined words and green dots to get additional details and explanations.
Explanations and definitions of terms.
What Is the Price Channel Pattern?
Stock markets always go up long-term, but correction occurs periodically. That's why we have stock market trends in which prices follow.
A price channel pattern is a figure from chart analysis that will describe the trend in which the prices evolve. It indicates that the prices move consistently in a specific interval between support and resistance.
It is composed of a trend line and a parallel line. This similar line will be higher if the trend is upward and lower if the movement is downward.
Types of Price Channel Pattern:
- Rising Channel Model
- Falling Channel Model
- Flat Price Channel Model
Rising Channel Pattern
It is illustrated by a pair of parallel lines, a support line that joins all the lows, and a resistance that connects the highs observed over the analysis period.
Falling Channel Pattern
It is made up of two parallel horizontal, oblique lines that define the path of the price in a declining trend.
Flat Price Channel Pattern
It comprises two parallel horizontal lines that frame the price evolution, called support and horizontal resistance.
How Do You Draw a Price Channel Pattern?
- Define the main trend line of the asset.
- Create the trend line by joining a minimum of two lowest lows (for a bullish trend) or at least two highest highs (for a bearish trend)
- Now trace the channel line parallel to the central trend line.
From there, you can set up an intraday trading plan or trend-following strategy to accumulate returns on your portfolio.
You can practice drawing the price channel pattern using the Olymp Trade platform here 📈
How Do You Trade With the Price Channel Pattern Strategy?
Follow the Trend Within the Range
If there is an uptrend on the stock, you would prefer to buy the price rebound on the channel's low support boundary. Then, on the channel's high resistance boundary, make a sale.
The low and high bounds of the channel allow you to create your price channel model strategy. It generates invalidation levels if the price effectively breaks the channel and takes profit levels if it reaches the channel's top.
Beware of fake signals. False breaks are still common. It would be best if you always waited for the candlestick to close.
Trade the Range Breaks
In this case, you are only interested in the closing channel's upward or downward price breakouts. You are not concerned with price fluctuations within the pattern. You are looking for trend breaks.
After a break, you can set a price target equal to the height of the price channel.
What Is the Price Channel Indicator?
Some platforms and software allow you to use the price channel indicator. You don't need to draw anything manually. It’s done automatically. The indicator is an advanced feature but follows the same logic as if you draw it manually.
The key difference:
- The lines are accurate.
- Can quickly make a stop loss or a take profit.
- Saves time.
Should You Use It as a Beginner?
Even if you are a beginner, following a strategy that works in the stock market is your best bet.
If you are hesitating or don't know where to start, our Help Center will give you all the required knowledge and information to get the best results.
Remember that even successful traders were beginners once, but with continuous learning and practicing on a platform like Olymp Trade, they are now the best.
This strategy will give you significant trading returns if you can master them.
To improve your trading, you can open a free demo account on the Olymp Trade platform and get familiar with the price channel model.
If you are confident enough, you should start making impressive trades with the price channel model.Go to Platform
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
A support level is a price level above which an asset stays during a given period.
The line made by several highs that “resists” the price on the way upwards.
Stop Loss is a postponed order that limits your losses on a trade to a specified level.
Take Profit is a postponed order that fixes your income on a trade at a specified level.