Technical Analysis | by ForexCycle.com | Wednesday, 14 January 2009 11:49 UTC
A channel is formed when the currency fluctuates in the middle of two parallel trendlines, i.e. between the resistance and support levels. To display a trend channel, we first draw a trendline. In the event of an uptrend, we draw this line above the lows of the price chart and in the event of a downtrend, above the highs. If we link a minimum of two highs, we get a straight line moving downwards. This can be employed to show possibilities for profit arising in a given trend.
The space between the two parallel trendlines, the lower of which is the support and the higher of which is the resistance line, is the channel. A channel can be sideways, downward or upward. The resistance line is the key trendline in a downtrend channel, whereas in an upward channel the key trendline is the support line.
When the bottom parallel line is cut through, this signifies that a currency is dropping and that there is a possibility that the trend will turn back. On the other hand, when the above parallel line is cut through, this means that the price of the currency is rising.
Normally, analysts first check the support lines and then the resistance lines of a given channel. Nevertheless, this does not carry great significance for a channel that has already been created. According to analysts, the creation of a new trend occurs when the price breaks out of the trend channel. Depending on the market's drive and instability, the new trend will be either medium-term or short-term.
The horizontal channel or sideways channel is also called trading range. It is distinguished by the lack of any marked trends upwards or downwards of a given currency exchange rate. Prices in a range channel move within the confines of the standard value.
The same schemes that are used for the downtrend and uptrend channels are also employed for the trading range, i.e. sideways channel.
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