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Trading Channels

A trading channel is the distance between two "almost" parallel lines that shows the trading range between the support areas and the dynamic resistance of a financial instrument on a price chart. This visual depiction shows the patterns that form in price charts, and are very useful for technical analysis. If there is a visible repetition in price fluctuation, the channel in question is valid, and can be used as an effective tool to analyze the price of the financial instrument. Price channels are best used for financial instruments, such as stocks, which are moderately volatile and experience regular swings. 

Trading channels can move upwards with a positive slope (ascending), downwards with a negative slope (descending), or without a slope (horizontal), but in any case the top and bottom lines of the channel must be almost parallel to one another. To draw a trading channel, two contact points are needed for the bottom line and two for the top, as can be seen below.  




Here it is necessary to mention that if the trading channel is ascending, it shows the greater power of traders who are anticipating a bullish trend in price, and if the slope of the canal is down or negative, it shows an advantage to traders who are anticipating a bearish trend in price. If there is a horizontal price channel, buyers or sellers don’t have a significant advantage over one another and there is no clear market price trend. In addition, a trader can buy a stock when the stock price touches the bottom of the channel at the support trend line and sell when the stock price touches the top of the channel at the resistance trend line to make a profit.