Charting and Technical Analysis: This pattern can form when the market is in an uptrend or downtrend but in both cases, prices remain in a channel as the market advances or declines. It is a pattern that can produce many trading opportunities.
In order for a bullish price channel to form the market needs to form a low followed by at least one subsequent higher low. The lows are connected with a line (the trendline) which provides support to the market. Traders look for the market to rally when the market hits this trendline.
The market also needs to make at least two highs that, when connected with a line, is parallel to the main trendline. Traders look for the market to decline when it hits the upper channel line. Some analysts may draw an upper line parallel to the main trendline after it forms in anticipation that it may develop into a price channel.
Examine the chart of Gold below which is an example of a bullish or upward price channel.
Charting and Technical Analysis - Price Channels. View charts in interactive mode at ProRealTime.com.
A bearish or downward sloping price channel is similar to the bullish one, of course, except that the trend is downwards.
Charting and Technical Analysis - Price Channels.
Don’t look for perfection. The market may not react exactly at the support or resistance lines every time. Sometimes prices may shoot higher or lower on an intra-day basis but close on or near the line. If you look closely at the chart you will see examples of this. The market may even close for a day or two above or below the line before returning to the price channel. Keep the bigger picture and the main trend in mind while implementing appropriate risk management and stop loss strategies.