How To Trade Channels

Channels are one of the most easy Chart Patterns to identify and trade. This makes them great pattern for beginners. There are few common mistakes to avoid when trading channels, which will be described.

Appearance Of Pattern

Channel is built from two parallel trend lines with the same slope. The distance between the two lines should be visible - if the lines are too close it is not a channel but a pennant. A channel is only valid after at least 3 peaks in one trend line, and 2 peaks on the second trend line.

How To Trade
Aggressive Trader - Trades will be taken this way:
For ascending Channels, long trades will be taken on the Support trend line (the lower trendline).
For descending Channels, short trades will be taken on the Resistance trend line (the upper trend line).

Illustration:

Classical Trader - Trades will be taken this way:
For both channels, long trades will be taken on the breakout of the upper trend line, and short trades will be taken on breakout of lower trend line.

Shorter trades will be stronger in descending channels, and vice versa for long trades.
Classical trader will also trade pullback - a retracement of price after it broke a certain trend line.

Illustration:

Profit Target
The Profit Target is measured using the Measure Rule. That is, you calculate the channel size, and project this range from the breakout place.

Illustration:

Channels are great patterns to trade - they usually provide precise entries with reasonable risk:reward ratio.