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A channel pattern is a chart pattern that combines several forms of technical analysis for identifying trade entry and exit points and controlling risks. A channel pattern is typically seen in the market when prices oscillate between two lines with the same slope. Traders use channels to establish price targets and stop-loss points and identify potential buy and sell points. In today’s article, we will cover the basic characteristics of channel patterns and how to trade using them.
Typically, channel patterns occur when price moves between two parallel trend lines on an asset. Lower trend lines indicate support and connect swing highs in price, while upper trend lines indicate resistance and connect swing lows. There are three types of parallel lines of resistance and support: falling lines, rising lines, and horizontal lines. When drawn on a chart, these lines always remain parallel to each other and form a channel between them.
Since it takes at least two lows and two highs to connect to one another, a channel must have at least four contact points. In general, there are three types of channels:
Because prices move more strongly in one direction than in the other, ascending and descending channels are also known as trend channels.
<source: Investopedia>
Here are three common rules to follow when trading channel patterns.
When trading in a rising channel, traders should focus on buying near the bottom and exiting near the top, while when trading in a descending channel, traders should focus on shorting near the top and exiting near the bottom.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.