The following shared content comes from: Wechat Public Account Hui Classroom
The foreign exchange market is changing rapidly, but there is a magic spell, no matter how the price fluctuates, it can never escape its palm.
This spell is the channel!
In the sharing of the trend line last time, (if you haven’t read it yet, check it out in the circle @外汇学习进入) we mentioned the channel. In fact, foreign exchange investment often requires the comprehensive application of various technical indicators and auxiliary tools. In the application of trend lines, the channel is an indispensable role!
As a simple indicator that must be learned in foreign exchange investment, learn it quickly if you don’t know it yet!
Basic introduction to channel indicators
The channel is developed on the basis of the trend line. Compared with the trend line, it has a greater control over the market price. In fact, it is equivalent to two parallel trend lines.
There are 3 major types of patterns, ascending channel, descending channel and sideways channel.
What we used above is actually the equidistant channel, but when you insert the channel object in the MT4 software, you can see the following 4 types of channels: equidistant channel, StdDev channel, regression channel, Andrew Harpoon theory. Let's see what's the difference between them?
The equidistant channel, which is what we use most often, is drawn by 2 parallel trendlines. Channel peaks and troughs can serve as entry opportunities.
The StdDev channel, also known as the standard deviation channel, is a channel formed by the midline of the price change, which forms two equidistant parallel lines up and down. The upper and lower lines correspond to the support line and the resistance line respectively. When the market price exceeds the upper and lower lines for too long, it means that the market trend may change.
The regression channel, which shows the same form as the standard deviation channel, is also composed of 3 lines. The middle trend line is the price equilibrium line, and the upper and lower two parallel lines are equidistant from the trend line.
The Andrew's Harpoon theory consists of 3 parallel trend lines shaped like a "pitchfork". The ratio between the 3 trendlines is the same as the Fibonacci ratio. It is more effective in medium and long-term transactions.
You should have found that no matter which channel, there is not much difference in application. The purpose is to predict the market trend through resistance and support and determine the entry point. So you don't have to know all of them, let's master the simplest isometric channel first.
How to apply equidistant channels
01
channel drawing
You can use channel indicators downloaded from the Internet or draw them yourself in MT4 software. The following is an example of inserting equidistant channel indicators in MT4 software:
In an upward trend, insert an equidistant channel object and connect 2 effective low points to get an ascending channel.
As shown in the figure below, there are 3 points in the rising trend line, the two points A and B at both ends are the two effective low points for determining the line, and the middle point C is used to shift the position of the trend line up and down. The upper end of the channel is a ray parallel to the trend line emanating from point D. Selecting point D can change the up and down position of the ray.
The lower track of the ascending channel supported the exchange rate three times to make it rebound, and the upper track suppressed the exchange rate twice to make it pull back.
In a downtrend, insert an equidistant channel and connect two effective high points to get a descending channel.
As shown in the figure below, the upper track of the same downward channel hindered the exchange rate's rise and breakthrough twice, and the lower track twice suppressed the exchange rate's decline.
02
valid authentication of the channel
Just as the validity of the trendline needs to be verified, since the channel is also formed according to the effective low point or high point, the validity of the channel also needs to be verified.
The validity of the trendline is verified by the 3rd low or high that appears on the line. The channel needs to be verified by the price turning back within the track, which is actually to prove whether the parallel line of the trend line can withstand the breakthrough of the exchange rate.
As shown in the figure below, the green descending channel is drawn by the points marked with circles in the figure. Because the lower rail of the channel does not withstand the price drop, this descending channel is invalid.
The descending channel represented by the red line is drawn from the points marked with the box in the figure. Because the lower rail has a pressure action, this channel is effective.
It turns out that when drawing a channel, the more price retracements occur, the more accurately the channel verifies the trend.
03
channel breakout
Although the channel is a curse, it will eventually be broken. There may be upward breakthroughs and downward breakthroughs in both the ascending channel and the descending channel.
When there is an upward breakthrough in the upward channel, you can redraw the upward trend line according to the breakthrough point to track the price rise, and you can consider entering the market at this time to do long.
When there is a downward breakthrough in the downward channel, a new downward trend line can also be drawn, and short positions can be made according to the downward trend of the price.
When the channel is broken, we often use channel translation to make further predictions. It is generally believed that after a channel is broken, the target for further breakthroughs is at least the range of one channel.
After the ascending channel is broken upward, if it breaks through 2 channels in a row, it is considered that the upward trend of the exchange rate is relatively strong; after the downward channel is broken down, if it breaks through 2 channels in a row, it is considered that the exchange rate is in a strong downward trend.
The figure below shows the upper and lower translational channels. In the lower channel, the exchange rate first breaks through the upper track of the channel at A, and then breaks through the second channel at B. You can go long at this time, but pay attention to setting a stop profit. Then the exchange rate fell below the two channels at C and D, showing a strong downward trend.
In trading, you can use the translation channel to test the strength of the trend.
04
Judging entry opportunities
When you can draw an effective channel and understand the concepts of channel breakthrough and translation, you can use the channel to judge the opportunity to enter the market.
In an ascending channel, go long when the price hits the bottom trendline and close your position when the price hits the top trendline.
In the descending channel, short positions are sold when the price reaches the upper track, and short positions are closed when the price touches the lower track.
As shown in the figure above, the entry opportunities of the ascending channel and the descending channel are respectively shown. It is worth noting that the upper track of the ascending channel is not suitable for short selling, because you know that the price will reverse or be broken by the upward trend soon. Similarly, it is not suitable to do long on the lower track of the descending channel.
Trend lines and channels are the most commonly used simple indicators in foreign exchange trading charts. Before studying other complex indicators, proficient application of these two tools is the prerequisite for your stable profit in the later period.
This is the end of today's sharing. Congratulations, you have learned another foreign exchange knowledge! Remember to pay attention to Forex Classroom, and bring you some foreign exchange knowledge every day. Investing and making money is not a dream!
Tell me in the message area, are trendlines and channels useful to you in actual trading?
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