Channel LinesTechnical Analysis
Channel lines slope in the same direction as trendlines but contain price movement. While a trendline requires two points to draw a trendline, the channel line requires only parallelism to the trendline while being touched once or more.
If a channel is drawn sloping down across the highs, the channel line is the bottom line. If a channel is drawn sloping up across the lows, the channel line is the top line. As long as the price stays between these two lines, the price is moving within a channel. If it breaks it will often break in the new trend direction. Be careful of early channel breaks: price must break and close for confirmation. A channel’s support line after break may become a resistance line. A channel’s resistance line after break may become a support line. After price breaks the volume should increase.
When price is inside the channel the actions taken depend on the nature of the channel. If the channel is rising, swing lows at the bottom channel line should generally be purchased for entry, especially if they occur on increased volume. Swing highs at the top of the channel can be sold if they are your price target. A swing low at the middle line can be bought, especially on increased volume. Typically swing lows at the mid-line are a sign of a strong trend. A swing high at the middle line should be considered a warning of a potentially weakening trend, since asset demand is no longer strong enough to move price to the top of the channel. A break of the top side indicates a change in demand for the asset so strong its broken the channel in the upward direction. Topside breaks should be confirmed with spikes in volume. A break to the bottom side of a channel indicates a substantial weakening in demand, if holding long trades, the asset should be sold.
For a falling channel, these processes are reversed. Swing highs at the top of the channel are generally short sale entries, especially if falls in price occur at higher volume. Swing lows at the bottom of the channel can be exit points for a trade. Swing highs in the middle of a falling channel may indicate a strengthening downtrend, they can also be short sold. A swing low at the middle of a channel are possibly a sign of weakness in the downtrend, these should serve as an exit to a short sale trade. Breaks to the bottom of the channel indicate sales pressure so strong it forced price outside of the channel. Breaks to the top side are definite exits from short sales, especially if they occur on higher volume. Since demand for the asset has increased so strongly the channel cannot be maintained.
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