Buy low, sell high, and follow the trend? Use channels cleverly to enhance Trade!

1. What is a channel?

A channel is one of the basic concepts in technical analysis and is often used to assist in Trend trading. A channel generally refers to a specific Trading Range formed by two parallel Trendlines, where prices fluctuate back and forth within this range for a period of time.

The two Trendlines that form the channel are also called channel lines, and they can act as resistance and support. The upper channel line acts as a potential resistance level, while the lower channel line acts as a potential support level.

According to different market trends, channels can be divided into three types:

• An upward channel appears in a systematically regular upward trend and is drawn as a parallel ascending space based on an upward Trendline.

• A downward channel appears in a systematically regular downward trend and is drawn as a parallel descending space based on a downward Trendline.

• A horizontal channel appears in a volatile Range and is formed by two horizontal Trendlines, creating a parallel horizontal space.

Regardless of the type of channel, they help investors more reasonably grasp Trading opportunities during the process of opening or closing positions.

II. Common Channel Trading Strategies

The premise of channel trading strategies is to identify a channel and draw the channel lines.

A channel essentially consists of a Trendlines and its parallel lines. As long as we can identify the channel, drawing the channel lines becomes relatively simple.

Taking an upward trend as an example, the first step in drawing the channel lines is to connect at least two low points to create an upward Trendlines. The second step is to draw a parallel Trendlines above this upward Trendlines.

The parallel Trendlines should not be drawn arbitrarily; it should connect at least two high points and match the price movement. In other words, if an ideal parallel Trendlines cannot be drawn, it indicates that there is no complete channel, and investors should not force the situation.

There are two common channel trading strategies: one is to conduct Range trading while the channel remains intact; the other is to conduct breakout trading when the channel is breached. Generally speaking, channel trading strategies should be used in conjunction with other Technical Indicators to better improve trading decisions.

• Channel Range Trading

The main characteristic of the channel is that it simultaneously provides potential Resistance and support levels. Therefore, conducting high sell and low buy within the channel is a basic trading strategy.

Specifically, when the price bounces off the lower channel line, consider buying; when the price falls back from the upper channel line, consider selling. Some relatively aggressive investors may enter the market early as the price approaches the channel line.

The channel range trading strategy effectively sets potential take-profit and stop-loss levels, helping investors better manage trading risks.

However, using channels for range trading has certain limitations. This is because channels are formed by historical price trends and cannot be used to predict future price movements. Additionally, channels will eventually be broken, and range trading cannot always be effective.

• Channel Breakout Trading

A breakout refers to the price escaping the potential bounds of the channel and moving outside of the channel lines. This process is often accompanied by a significant increase in market volume and volatility.

A breakout indicates that the integrity of the channel is being challenged, and the market may completely move away from the original channel, developing further in the direction of the breakout.

Generally speaking, when the price breaks above the channel line, consider going long; when the price breaks below the channel line, consider going short.

Breakout trading carries greater potential risks because the market may occasionally issue false breakout signals. A more conservative approach is to wait for the market to retest and confirm that the breakout is valid before considering entry.

3. Case Analysis

Figure 1 shows an upward trend with several price highs and lows that exhibit a roughly parallel movement, thus investors can attempt to draw the channel lines.

When Trading using channels, one important point to keep in mind is to try to trade with the trend. For example, when the current market is in an upward trend, it is best to go long, rather than short.

With the confirmation to go long, investors can combine other technical analysis tools to capture or confirm potential buy and sell signals.

As shown in Figure 2, when the price bounces off the lower channel line, it is a potential buy signal. Some relatively aggressive investors may use other technical indicators to capture some early entry signals, such as when the price bounces off the 20-day moving average (MA20) or when the RSI indicator approaches the 50 midpoint.

Similarly, when the price falls from the upper channel line, it is a potential sell signal. Additionally, investors can also consider selling when the RSI indicator drops to the 70 overbought line, which can increase potential trading opportunities.

Figure 3 is a descending channel on the daily chart. When the price repeatedly touches the upper channel line for several consecutive days, investors need to be cautious, as this indicates that the channel may be broken at any time and the trend could reverse upwards.

In such cases, investors can refer to shorter period charts, such as the 4-hour chart, to further assess the possibility of an upward trend reversal.

Figure 4 shows the price trend on the 4-hour chart. Observant investors may notice that a horizontal channel has appeared on the 4-hour chart, suggesting that the downward momentum has stalled. At the same time, there are also signs that the horizontal channel has been broken. Therefore, the possibility of a price rebound is quite high.

This content discusses technical analysis; other methods, including Fundamental Analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect expected results.

All investments involve risks, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful.