Chart patterns are one of the bases of technical analysis in Forex trading. Today we will discuss one of the first patterns that you need to learn before proceeding with your career in currency exchange – the Channel chart pattern. In this article we will discuss Forex channels and the way you can take advantage of them in trading.
What is Channel Chart Pattern
We have a channel pattern when the price is increasing/decreasing with the same intensity based on tops and bottoms. In this relation, two parallel lines could be drawn through the tops and the bottoms of the price action, which creates the channel.
Forex channels are an upgraded version of Trend Lines. The difference is that channels also suggest for how long an impulse could continue.
For this reason, channel patterns give you the opportunity to trade the trend impulse, as well as the correction. The reason for this is that the channel indicator suggests the end of the impulse and the beginning of the correction creating a fresh entry point on the chart.
Types of Channel Patterns
There are two types of chart patterns in Forex based on the direction of the trend: bullish channel and bearish channel.
The bullish channel represents price increase where the tops and bottoms are increasing with the same intensity.
The bearish channel chart pattern illustrates a price decrease where the tops and bottoms are decreasing with the same intensity.
Forex Channel Pattern Example
The two parallel blue lines illustrate a bearish channel pattern. The upper channel level acts as a resistance where the lower level acts as a support. Each time the price bounces from the upper or the lower level represents a tradable trading opportunity.
Forex Channel Breakout
Yes, but that’s not all about Forex channels. There is another lucrative trading opportunity that appears during channeling price moves. This is the channel breakout in Forex.
Every trading channel comes to its end at some point. This usually appears by a visual breakout on the chart as shown on the image above. Since the channel is broken, we have an indication that the price is eventually willing to change its direction.
So, a bearish channel broken through the upper level is an indication for an upcoming bullish move.
Opposite to this, a bullish channel that is broken through the lower level hints that the price might eventually start a decrease.
In both cases, this is an opportunity to enter the market against the previous trend and to try to hop in the beginning of a potential reversal.