Equidistant or parallel channels are extremely powerful in FX. They can even be used alone to plot price movement and trades can be taken entirely without the use of indicators.
Putting channels together, the trader can see the following:
1. Gradient or steepness of channel indicates how much energy there is in a particular movement and how sustainable it is.
2. The direction of the channel is the prefered direction of trade.
3. Boundaries of the channels act as resistance or support; they are also the most attractive point to buy or sell.
4. The width of the channel indicates potential profit attainable; trades can be evaluated entirely based on reward-risk ratio.
5. When multiple channels meet, chart patterns form as forces fight. These areas of congestion tells a trader when additional volatility might be expected. (See example in the illustration where two ‘colliding’ channels lead to price movement with a wedge.)
6. When steep channels run out and gentle channels take over, a movement is more sustainable but can also suggest reversal in the near future.
Now how can a trader make use of channels to win money? Here are some rules to help:
A. Instead of drawing single trendlines, draw only channels in future to visualize boundaries.
B. Only trade in the direction of trend.
C. Trade only when the reward – risk proposition is high.
D. Do not play break out.
Simple trading method using parallel channels
Voila!
