the hAnDbook of teChniCAl AnAlysisfigUre 13.47 Constructing Channels.
create a standard uptrend line based on troughs 1 and 3. A parallel line, called
the channel or return line, is then projected from peak 2 upward, thus com-
pleting the rising channel. No breakout is required for channel completion.
The alternative approach, which is less popular, is to construct an uptrend line
based on peaks 1 and 3, with a parallel line projected upward from trough 2.
In downtrending channels, the conventional approach is to first construct a
standard downtrend line based on peaks 1 and 3. A parallel line, represent-
ing the channel or return line, is then projected downward from trough 2,
thus completing the falling channel. The alternative approach is to construct a
downtrend line based on troughs 1 and 3, with a parallel line projected down-
ward from peak 2. See Figure 13.47.
Channels provide great opportunities for:
■ (^) Buying or covering at support
■ (^) Shorting or liquidating at resistance
■ (^) Indicating potential future price targets
■ (^) Indicating potential changes in trend
It should be noted that the first tradable point will be Point 4 in all cases, either
by buying at Point 4 in a rising channel or selling at Point 4 in a falling channel
with a stoploss placed just beyond the up- or downtrend lines, respectively. Should
price violate the channel at Point 4, a breakout trade is initiated. It is important to
also note that it is safer to establish:
■ (^) A short position in a downside breakout of a rising channel
■ (^) A long position in an upside breakout of a falling channel