By: Charley Warady
As far as Forex technical analysis is concerned, there are waves, and curves, and intersections, and every variance in between, but there are none clearer than the relatively simple Forex channel. So simple, as a matter of fact, that you almost don't have to draw any physical lines to see it on the charts.
The Forex channel is a great way to trade because of its simplicity. It not only gives you support and resistance in the Forex market, but it also gives you a trading range.
The whole concept of a Forex channel deals directly with trend lines. In order for a trend line to considered legitimate it should have at least three points. Obviously, the more points involved in the line, the more accurate the trend will be. These trend lines should have a top one and a bottom one.
This is where the definition of a Forex channel comes into play. In order for it to be a Forex channel, the top line and the bottom line must be parallel; otherwise it is considered something else. The frequency of this occurrence will surprise you.
You don't have to be a mathematical genius to use this method. There are no equations; as a matter of fact there's no math involved at all. In the old days when people bought weekly chart books, this was done with a ruler or a straight edge. Now, with live online Forex charts, the ability is as easy as a click of a button.
Once you can see an area of parallel lines on chart, you know that in front of you is a Forex channel. You know where the resistance, and you know where the support is.
Types of channels
There are three types involving a Forex channel, and the types are as obvious as the method.
There is the ascending Forex channel which shows an uptrend in the market. In this kind of situation there are going to be higher highs and lower lows. The resistance is going to be continually higher as the days go on along with the support.
There is the descending Forex channel which shows a downtrend in the market. This bearish version will show the highs of the day on a lower level and the market continues as well as the lows of the day being increasingly lower.
Then there is the probably the most frustrating one of the three. The horizontal channel. This kind of market shows a trading range. Oftentimes in slow market situations, the charts will show this kind of Forex channel. It's nothing to get bullish or bearish about, and it always appears that the Forex market is ready to do something but it is waiting around for an excuse to break out. It may or it may not. In either case, it's a great market to trade as long as you keep an eye on things to make sure there is no break out.
Keep an eye on things
You should always keep an eye on how the market treats your resistance and support levels. Because once these lines are definitively crossed, they still remain a line; whether it be support or resistance. That's one of the beauties of the Forex channel system. You don't necessarily leave a channel; in most cases all you are doing it entering another one.