You’ll also learn why these channels have more chance of working at specific locations.
In a bull channel, the market moves downwards between two adjacent trendlines, before eventually breaking out upwards. In a bear channel the opposite is true; the market moves upwards between two adjacent trendlines, before eventually falling.
There are many ways to draw channels. Some traders take a scientific approach, but for me the charts are a representation of human emotions and as such, every channel will be different.
I start by finding two or more points on a trendline and then “best fit” the adjacent trendline. Sometimes you will get a perfect fit against candle wicks. Other times, you may want to cross through wicks. The key is to fit as many price points as possible.
Now, in the above example, did you notice something obvious? A channel is only of any use to use if it terminates at an important area to trade, such as a supply/demand zone or a support/resistance area.
Let’s take a look at that chart again. This time notice the channel terminated at a support area. The ideal trade would be to buy where the lower channel meets the support line. You’ll notice that before the 2nd low is established, our channel line will be a bit lower.
Here is an example of a bear channel. It’s quite shallow sloping, but notice the multiple touches on the lower trendline. The key take-away here is that the channel terminated at an important area; a lower timeframe supply zone and a Price Pivot Zone (please see my other material for more on PPZ’s).
Sometimes it makes more sense to draw a wedge pattern. This example shows a good number of price points fitting perfectly and ending at a demand zone. Just as downward channels are bullish, so are downward sloping wedges. And the converse holds true for upward sloping wedges.
In this Bear channel example, we have a good supply zone. The market has moved very quickly away from the zone and set up for a nice return to sell.
Before the market reaches supply and the channel is fully drawn, we can still predict where point 3 of the channel will be given it should terminate at the zone.This gives us confidence that points 1 and 2 are correct.
I’ve used a best fit approach for the adjacent side of the channel to fit as many candles as possible.
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