Thus far we have covered the subjects of horizontal and diagonal support & resistance. In this article I will show you some live examples of trends and channels. A channel is formed when an upper line (in the case of an uptrend) runs parallel and equal to the support line.
How To Use Channel Lines
If your goal is to always trade with the trend (the more conservative method) then the upper line of a channel can be very useful in helping to pick your profit target. The principle is exactly the same as support lines. If price has reacted there before (the more times the better and stronger) then price will probably do so again. Having said that there are NO guarantees in forex. Probability is the best you can hope for as traders.
Risk Reward Ratio & Channels
The great thing about trading channels is that the risk reward ratio of a trade is usually excellent as they only require small stops to be placed the other side of the trend line. Risk reward ratio refers to how much money you need to risk, versus the potential gain. For example if the channel is 2oo pips between top and bottom and you only need to place a 20 pip stop just below a line then your risk reward ratio is an awesome 1:10. I NEVER enter trades without a bare minimum of 1:2 risk reward.
How to Draw Forex Trend & Channel Lines
To summarise, here is how to draw these important lines on your charts:
In an uptrend the line is placed along the lows of the candles. An up trend is of course defined by higher highs and higher lows.
In a downtrend lines are placed on the highs of the candles. A down trend is defined by lower highs and lower lows.
The line uses the extremes of the candlesticks. Sometimes known as wicks. This is the high or the low price. These extremes are important because a close beyond the extreme tells traders the trend might be changing. This is an entry or an exit signal.
The more often a line is hit by price extremes, but not broken, the more powerful the line signal.
For a more aggressive trader then the upper line can also be used to enter trades. If I take a counter trend trade such as this I half my usual stake as it is higher risk. Traders can always add to their positions once the first trade is in profit, thereby increasing the profit potential whilst at the same time reducing the risk.
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