A candlestick chart is the most common way to view the history of an asset’s price action. Often, the asset will spend periods of time bouncing between 2 levels, seemingly locked into a set “channel” on the chart. These channels can be horizontal, which signifies an indecisive market and is similar to a period of consolidation, or vertical, either ascending or descending. A price channel can help traders determine at what point within a cycle an asset is at.
How does a Price Channel Occur?
Naturally, buyers and sellers of an asset cause the value to increase and decrease, depending on which market participants are using a larger volume. When a security’s is buffeted by the forces of supply and demand, a price channel can appear. These channels can be deep and appear more clearly on a weekly chart or much thinner and best viewed on the hourly or daily chart. Either way, the channel is carved by points at which a price reversal occurs on a visible line. The channel boundaries become levels of support and resistance.
How can Traders use a Price Channel?
If an asset’s price is oscillating within a channel, there’s an increased likelihood that it will bounce off the support or resistance lines back in towards the midline of the channel. When the price hits the support line, it could be a good opportunity to open a long position as the price is most likely heading towards the resistance line, or at least the midline. On the other hand, when the price hits the resistance line within a channel, a short (or sell position) may yield a good profit. This is one of the positives of using price channels to capitalise on price action. Traders can use both long and short positions to profit in both directions.
It’s important to use caution when using this method though as it’s always possible to be caught out by a stop run or breakout from the channel. One way professional traders are known to take out amateurs is by driving the price down before buying back again to push the price back into the channel.
Using a price channel as a fundamental understanding of the general direction of a trend is a great place to start when making trading decisions. However, it’s recommended to use other tools and patterns to base targets on. Finding patterns such as bull flags, pennants and double tops will likely yield more accurate results than blindly shorting a market just because its at the top of an ascending channel. To become and even more accurate trader, try learning how use oscillating technical tools such as an ROC or MACD to spot divergence, which will give a good indication of market momentum rather than just relying on the current price alone.
The best traders don’t rely solely on one single pattern, chart, or indicator. They use a combination of tools to determine the likelihood of future price movements. In crypto trading, a channel can easily be invalidated by something as trivial as a high-profile tweet about a certain coin. It’s for this reason that low leverage trades are a much safer option than trying to make huge profits on small price fluctuations.