If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a “channel”.
The upper trend line marks resistance and the lower trend line marks support. So both the tops and bottoms of channels represent potential areas of support or resistance.
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the most recent peak. This should be done at the same time you create the trend line.
To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.
When prices hit the upper trend line, this may be used as a selling area.
Types of Trend Channels
Ascending channel (higher highs and higher lows)
- Descending channel (lower highs and lower lows)
- Horizontal channel (ranging)
Important things to remember about drawing trend channels:
bottom of the trend channel is considered a “buy zone” while the top of the trend channel is considered a “sell zone”.
A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at a different angle is not correct and could lead to bad trades.
That said, trend channels don’t have to be completely parallel. Nor does 100% of price action have to fit within the channel.
They miss important information about price action and close their eyes to other important clues.