Trading price channels is a type of trend trading which can be particularly effective when used in crypto, because crypto assets rarely fluctuate within a narrow range, but tend to develop into a stronger trends.
Before learning how to trade with them, traders must understand how to draw channels on the chart. First, observe the price movement, and then find the trend price movement, that is, the top and bottom move with the same strength. In an uptrend, you can draw a line that crosses the bottom and a corresponding parallel line that crosses the top of the price trend.
In the image above, you can see a standard channel capturing a bullish trend. The bottom of the channel is a typical bull trend line, which crosses the bottom of the price. The upper line is parallel to the lower line, connecting the upper end of the price action.
In this rising channel, the lower part of the channel plays a supporting role, and the upper part plays a role of resistance. The black arrow on the chart points to the support and resistance channel function on the chart. When the price falls below the channel, it rebounds upward. Then the price seeks to interact with the upper part of the channel, and has a downward trend of rebound, and vice versa. After understanding this, traders can use channel levels to judge entry and exit points. When the channel rises, you can buy when the price rebounds from the lower level, and hold the position until the price is close to the upper level of the channel.
The impetus of trading channels in this way. When the price rebounds from above, you can short the potential bear market trend. Then this is usually not desirable because the price volatility of the correction wave is smaller than that of the impulse wave.
Like all price trends, a channel trend will eventually end. When the price breaks above or below the channel, and ends far away from the price level, a channel breakout is formed. As a result, the price action exits the channel and no longer conforms to the previous pattern.
The following is an example of a channel breakthrough:
As shown in the above figure, when the price stops moving witn the channel, we have a channel break. The price breaking below indicates that the selling pressure is strong and managed to alter the original bullish trend. After that, the price started a new bearish trend.
A channel breakout is a warning, suggesting that the price will move in the direction of the breakout. At this point, traders can prepare to place orders from the direction of the breakthrough in order to catch new price movements.
Use channels for trading
As discussed earlier, successfully trading price channels requires exploiting the internal rebound within the channel. In addition, traders should plan for potential breakouts, meaning getting reasy for a reversal of the price trend.
In this image, at the beginning, the price plummeted and formed a bottom ①, the first point of the channel. Then the price rises, forming a top ②. Then the selling force pushes the price downward, forming ③. Finally, the price rises further and stopped at ④, confirming the channel.
④ is the first trading opportunity on the chart. When the price touched the upper part of the descending channel for the second time, it constituted a potential short position. After that, the price rebounded further, creating two longs and two shorts. However, we should note that this is a descending channel, so we are more inclined to go short and wait for the channel to break before looking for a long position.
Pay attention to the last short-selling opportunity in the channel. You can see that the price rebounded downward, but did not reach the bottom. A break above the channel can be regarded as a short end signal. However, at the same time, the price created a new bull signal and became a bullish breakout in the descending channel.
Linear regression channel
One of the most popular indicators is the linear regression channel. The channel indicator looks similar to the standard channel, but the linear regression channel indicator has a middle line. The distance between the upper trajectory and the lower trajectory of the channel is equal to the middle line.
In this indicator, the middle line of the linear regression line also acts as a support or resistance line. In addition, this line can also be regarded as a transaction trigger point, and orders are placed in the direction of this trend.
The above picture is a standard linear regression channel. The black arrow in the chart points to the moment when the channel price behavior reacts to the middle line.
We found that after prices rebound from the middle line, they usually fall back to their original positions. At the same time, when the price breaks through the middle line, the price further moves in the opposite direction of the channel line.
Traders can use the middle line in the linear regression channel to confirm the transaction. In addition, the middle line can also be used as a departure signal.