Forex traders use price channels to identity potential buying and selling points. Price channels consist of two parallel lines that track the currency pair’s price movements. The currency pair’s prices fall between the two parallel lines. Price channels expand when prices are volatile and contract when price momentum is minimal. Forex traders also use price channels to identify existing trends and potential trend reversal points.
Step 1Understand that you can use price channels if the currency pair is trending upward or downward or is trading sideways. The lower line is drawn beneath the lowest prices and the upper line is drawn above the high prices. The two lines represent support and resistance levels depending on the currency pair’s direction. Most of the prices should fall within the price channel. You can use price channels on any time frame including the five-minute chart, 10-minute chart, 30-minute chart and day chart.
Step 2Go to your online Forex trading account or use a free Forex charting service. Pull up the chart for a currency pair such as the EUR/JPY (Euro dollar/Japanese yen). Select the time frame you want to trade. Find the technical indictor list and select “Price Channel.” Decide where you want your lower trend line to begin and end. Click on your starting point. Draw a line to your end point to create the lower channel line.
Step 3Choose your upper line start and end points. Click on the starting point and draw a line to the end point to create your upper trend line. Your price channel should have two parallel lines with most of the prices between them.
Step 4Analyze the EUR/JPY chart to determine if the currency pair is trending or range trading. Prices making higher lows and higher highs are ascending, or bullish, price channels. Prices making lower lows and lower highs are descending, or bearish, price channels. Prices in the same range are range-bound channels.
Step 5Use the type of price channel to help determine your trading strategy. If the EUR/JPY is in an ascending price channel, buy the currency pair when the price bounces off the lower price channel line. If it is in a descending price channel, sell the EUR/JPY when the price bounces off the high price channel line. If the price is range-bound, wait until the price bounces off the high or low price channel line to open a trade.