Practical Price Channel Trading Strategy For Best Results

price channel trading

Trends, which are nothing more than a price and time movement in one direction, are where the idea of price channel trading originates. Price channels provide excellent opportunities to make money irrespective of type of trend and even in case of range bound channel. 

Price channels incorporate all of these functionalities, as well as one parallel line to the direction of trend, in the same way that trends provide important information about the overall market direction or the direction of a specific stock, as well as areas of support and resistance in charts.

Table of Contents

 The price channel trading strategy is to use important information provided by price channels to find buy and sell signals with a high probability of profit.

Let us begin with some fundamentals before moving on to the price channel trading setup for profitable trading.

What is a Price Channel

A price channel is the path of price movement and the area enclosed within the boundary of two support and resistance levels, which can also be trendlines.

Price channel represents activity of price movement within some range over a period of time, price channel can only be visible after certain number of contact points are already can be seen in charts usually three touchpoints are necessary to confirm a price channel.

Price channel provide below important information to traders –

How To Draw Price Channels

To draw price channels for trading, first identify if there is a trend by looking at the swing highs and swing lows; if there is, draw a trendline connecting the swing lows for an uptrend and a trendline connecting the swing highs for a downtrend.

Once the trendline is drawn, a line parallel to it is plotted, connecting either swing lows (in the case of a downtrend) or swing highs (in the case of an uptrend).

Like the thumb rule in drawing trendlines a minimum contact points of 3 is required to confirm a price channel in place.

For example, if there is no trend in the market but market swings are within a visible range, draw support and resistance lines that enclose the range of price movement; this is also a price channel formation.

Types of Price Channels

Price channels can be classified into six types based on their construction, trends, volatility, and applications. –

  1. Bullish Price Channel
  2. Bearish Price Channel
  3. Sideways / Neutral  Price Channel
  4. Narrow Price Range Channel
  5. Wide Price Channels
  6. Dynamic Channel

1. Bullish Price Channel

The bullish price channel, also known as an uptrend channel, represents market bullishness and is formed by drawing a line parallel to the uptrend line by connecting swing highs. 

2. Bearish Price Channel

Bearish price channels, also known as downtrend channels, form during a downtrend.

A bearish price channel is formed by first drawing a downtrend line and then drawing a parallel line connecting swing lows.

3. Sideways / Neutral Price Channel

Because sideways or neutral price channels are neither bullish nor bearish, they are also referred to as neutral price channels.

Sideways price channels are formed by connecting resistance and support levels.

4. Narrow Price Range Channel

Narrow range price channels are price channels in which price movement is within a narrow range; these channels represent a fall in volatility and frequently result in explosive breakouts in either direction.

5. Wide Price Channels

When price swings within a price channel cover a larger area and have a wide range, a wide price channel is formed. A wide price channel indicates greater volatility in price movements.

6. Dynamic Channels

Aside from trendlines, price channel boundaries are formed using standard deviation from the mean (bollinger bands) and average true range from a moving average (keltner’s channels).

The boundaries of such price channels are dynamic and react to price movements.

Price Channel Trading Strategies

Price channels are important price action trading structures that will always be important in any price action trading strategy, regardless of how you use them.

Broadly there are 5 ways to trade price channels-

  1. Trend Price Channel Trading Strategy
  2. Reversal Price Channel Trading Strategy
  3. Trading Ranges with Price channels
  4. Breakout  Price Channel Trading Strategy
  5. Envelope or Band Price channel Trading Strategy

1. Trend Price Channel Trading Strategy

2. Reversal Price Channel Trading Strategy

3. Trading Ranges with Price channels

4. Breakout Price Channel Trading Strategy

5. Envelope or Band Price channel Trading Strategy

Strength and Weakness of Using Price Channel Trading

There are no holy grails in trading, just as trendlines and price channels have merits and demerits that must be carefully considered before trading them. The edge of trading lies when price action trading tools are used with their strengths and weaknesses.



Price Channel Trading FAQ

What are Price Channels?

Price channels are narrow or wide consolidation of price move, and a range bound phase of market.

How To Trade Price Channels?

Wait for price channel breakout and retest the upper or lower boundary of channel and then place the entry in direction of price move.

Is price channel trading strategy profitable?

Price channel trading strategy is profitable way of making money in market, if you know how to analyze price action in general.

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