Channel analysis and strategy

On this topic, I thought to present you a simple idea, that that involves only few tools: trend lines, and specifically how the trend lines can be used in a very practical manner, namely:

Price channels

Chapter I

Concomitant integration of both time and space in drawing the channels

This subject, as ordinarily it would look, apparently, is not very addressed by many traders and aspiring traders, at least not the version that I would present below, in this chapter and in the following ones. Most of the people who are drawing their own channels, they are doing on the periods when the charts are very convincing development - which is wrong in essence, like in the example bellow:



Maybe, on the first look, you would say: It's a genuine channel! but, unfortunately it isn't. Drawing channels, considering only the space dimension is the not perfect way to do it and it makes perfect sense. Price, as you know it, it is not something which is formed only in space, is formed in both time and space. About the time dimension, almost nobody is considering that it would be better to use it, so you are not a special snowflake, trust me.

If, on the chart, on the metatrader (I will use it in my examples because is used my many people) you activate the "Show periods separator" from the Properties section (right click on any chart or F8 from keyboard) you will nicely see how the chart is divided in few time zones and you will see that the chart has not been framed in time, at least not entirely.



The price should be framed very well in time and space or else we cannot talk about channels.



to be continued with chapter no.2 and chapter no.3.

Chapter II

Balance of power: Bulls versus bears balance

a. Tracing rules

But even before tracing the channel, we need to establish if the channel will have a downside slope or an upside one. And to do that, we need a Fibonacci retrace tool, you can find it in the path Insert -> Fibonacci -> Retracement, in the metatrader 4, to plot it on the low and the high on the period we are interested; usually on three period time, but you can experiment more periods. I recommend it to be multiple of 3 periods.
So, after you did that, we are interested to see the where the price is situated in relation with 50 level Fibonacci retrace. The candle which has closed the the third period interval. If that candle is closing bellow, the channel will be a downside one, if not - vice versa.

Here we have two illustrant examples how it works






b. Balance of power tilt

And here we have a clear, understandable explanation of the principle behind this type of channel analysis. It's easy to understand for everyone of you, no matter your past training level and so forth.

Unconcerned of the channel orientation, if it is in upside state, in downside and very rarely horizontally positioned (not so often as the speciallity literatures says), bulls or the bears are in control in any given moment. And, this thing happens until the balance is tilting from one to another, very rarely they are in a perfect balance.

So, in a given channel, the price positioning over the median line of the channel is cautiously signaling that the bulls are in some way in control, not a very strong manner, but in control, and vice versa.

c. Balance of power shift

Obviously, in an upside channel, the price positioning under the inferior channel line means the temporary finnish of an up trend and that's why the transactions opened against the big movement can be correctly evaluated and, when I say that, I am underlining the importance of the targets, which had to be tight, because we assume the movement which will developp is only a short correction on the entire upside movement.



So, as you can later on learn, the low risk situations and caution will be the prime idea of the chapter, cause the markets are very impredictible sometimes.