In this tutorial we will be looking at parallel channels, how to identify them, how to scout for trading opportunities in order to trade them and how to find price targets for them. This will be one of many tutorials to come in this series, but when making this, I assume that you already have a basic understanding of how candles work, identifying trend direction and plotting basic trend lines. If not, I would recommend looking at a YouTube video or something a bit more basic to get those locked in. The first few parts of this series is still aimed at fairly new traders and will continue to more advanced tutorials where we look at how to make use of more advanced charting tools to identify price movement and trade opportunities. So lets get in to it......
What is a parallel channel and how to identify it?
If something has a parallel, it is similar to something else, but exists or happens in a different place or at a different time. As an example the = (equals to sign), has 2 lines, parallel to each other and the area between them is what we refer to as the channel. In trading its the same, we have trend lines in parallel, depicting the upper area of resistance and lower area of support for a particular security. As the price moves between these 2 trend lines without breaking support or resistance, then it is viewed as a parallel price channel. One we find a price movement like in the image below, we can safely assume that we have identified a parallel channel.
What types of parallel channels are there in trading?
There are 3 types of channels we could identify on a chart. Ascending & descending are the ones we will look at as they provide a clear indication for where the price of a security might move. The ascending channel is when price movement happens in the channel creating a sequence of higher highs and higher lows, eventually breaking below the support. This is generally a bearish signal and we should be looking for a short trade opportunity. Likewise, the opposite is true for a descending channel, a sequence of lower lows and lower high are created, with an eventual break of the upper resistance trend line.
How do I trade the the parallel channel and how do i set the trade target?
In a descending channel, the first area of resistance would normally give us and indication of a breakout target for that channel and this would be the first area of support for an ascending channel. What we would look for is a higher area of support before retesting resistance in a descending channel and a lower area of resistance in an ascending channel, this would generally signal that there might be a breakout on the horizon. Our trade entry would be set to the breakout points and out take profits can we set to the breakout price targets.
Thats its for this tutorial, happy trading!
What is a parallel channel and how to identify it?
If something has a parallel, it is similar to something else, but exists or happens in a different place or at a different time. As an example the = (equals to sign), has 2 lines, parallel to each other and the area between them is what we refer to as the channel. In trading its the same, we have trend lines in parallel, depicting the upper area of resistance and lower area of support for a particular security. As the price moves between these 2 trend lines without breaking support or resistance, then it is viewed as a parallel price channel. One we find a price movement like in the image below, we can safely assume that we have identified a parallel channel.
What types of parallel channels are there in trading?
There are 3 types of channels we could identify on a chart. Ascending & descending are the ones we will look at as they provide a clear indication for where the price of a security might move. The ascending channel is when price movement happens in the channel creating a sequence of higher highs and higher lows, eventually breaking below the support. This is generally a bearish signal and we should be looking for a short trade opportunity. Likewise, the opposite is true for a descending channel, a sequence of lower lows and lower high are created, with an eventual break of the upper resistance trend line.
How do I trade the the parallel channel and how do i set the trade target?
In a descending channel, the first area of resistance would normally give us and indication of a breakout target for that channel and this would be the first area of support for an ascending channel. What we would look for is a higher area of support before retesting resistance in a descending channel and a lower area of resistance in an ascending channel, this would generally signal that there might be a breakout on the horizon. Our trade entry would be set to the breakout points and out take profits can we set to the breakout price targets.
Thats its for this tutorial, happy trading!