InvestorQ : What are Channels in technical analysis and are they different from the trend lines?
Aashna Tripathi made post

What are Channels in technical analysis and are they different from the trend lines?

Answer
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Tisha Malhotra answered.
1 year ago


Channels are created by a combination of trend lines. In other words, Channels are simply trend lines drawn parallel to one another. In particular, an ascending channel is formed when the rising trend line connecting the lows of recent price action has a parallel rising trend line connecting the latest highs. On the other hand, a descending trend channel is created by drawing a trend line connecting the latest highs and having a parallel downtrend line connecting the latest lows.

Why are channels important? That is because, Channels tend to be more potent trade signals since these could also provide potential take-profit levels. Trend-following traders could enter trades in the same direction of the overall market trend, which means shorting at the top of the falling channel or going long at the bottom of a rising channel. On the other hand, the counter-trend traders can enter trades in the opposite direction of the channel trend, which means going long at the bottom of a falling channel or shorting at the top of a rising channel.

Traders need to quickly realize that in general countertrend trades tend to be a little more risky while trend-following setups do have a higher probability of winning. But the big money is normally made in counter trend trades and not by staying with the trend. Traders often look for confluence or the lining up of several kinds of inflection points for confirmation before deciding to jump in a countertrend setup.