We already saw that by drawing trend lines we could tell in which direction prices are moving (up, down or sideways). If we extend that line to the end of the chart, we have a notion of how far the price could go in a given time. But only in that direction.
Channels, on the other hand, allow us to determine what the lows and highs might be, helping us to detect support and resistance. Channels are the most common formations. They are formed by two parallel lines, where the upper one acts as resistance and the lower one as support. That is to say, they not only tell us what the trend is, but they also set the limits of the trend.
Bullish channel
A strategy in bullish channels is, for example if you are investing upwards, to buy when the price is at the base of the channel, i.e. support, and sell when it is near the top, i.e. resistance. It is important that the channel has sufficient width.
When the price does not touch the top of the bullish channel, there is likely to be a change in trend, as shown in the picture below. This is an indication.
When a trend reversal occurs in a bullish channel, it could extend to the width of the channel it broke. In this way, it measures up to what price the change of trend could reach (it may or may not happen).
Bearish channel
A strategy in the bearish channels is, for example if you are investing downwards, to sell (short strategy, we will see it later) when the price is at the top of the channel, that is to say the resistance, and to buy when it is near the base of the channel, the support. It is important that the channel has sufficient width.
A possible change of trend is announced if the price does not reach the base of the bearish channel.
When a trend reversal occurs in a bearish channel, it could extend to the width of the channel it broke. In this way, it is measured up to what price the change of trend could reach (it may or may not happen).
Sideways channel
We do not usually operate in these channels, as there is high volatility and the price does not move much. Later on we will see what these side channels are used for, seen as a rectangle or range formation.