Introduction to Technical Analysis Part 4: Channels
Channels
A channel is an extension of the trendline. In an uptrend, the channel line is drawn parallel to the trendline above the price action. In a downtrend, the channel line is drawn parallel to the trendline below price action. The trendline and channel line should engulf the price action. Channels are more useful to an analyst than a trendline because they identify a minimum price objective for the market should the price break out of the channel.
The important line in a channel pattern is still the trendline. The channel line is purely a measuring line and should not be used as a trading signal. It can be used as a take profit indicator, but it should not be used to establish a position against the prevailing trend.
Once the channel line has been drawn on the chart, the width can be measured and projected from the break of the trendline. This is the Minimum Price Objective (MPO).
Trendline is confirmed by the third touch . Parallel draw in with two touches. Sell expecting market to go lower, still in downtrend. Stop and reverse above trendline currently @ 106.52.
Break above the trendline indicates potential trend reversal. Measure width of channel and project MPO from the break out. Stop and reverse triggered so now long and carrying small loss.
The market moves strongly towards 61.8% of the Minimum Price Objective. It then retraces back to the break out area — chance to buy more or establish a long position if the initial break was missed. Market then moves stronger higher and forms a pennant (covered later in the patterns section), before another strong move up to the MPO,.the market then moves higher again to find resistenace just below 161.8% of the MPO, coinciding with the previous high in august. By this time the market had formed another channel with the new uptrend.
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