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Forex Chart Patterns Part 3: Channels and Rectangles

Channels are formed when prices trend between two parallel lines. A price channel shows the upper and lower boundaries of price movement over time. Channels can be upward sloping (bullish) or downward sloping (bearish). A rectangle pattern forms during a sideways consolidation period, bounded by horizontal lines connecting high and low prices. Breakouts above resistance or below support can signal a resumption of the prior trend. The document provides examples of bullish and bearish price channels and rectangles, demonstrating how smaller patterns can form within larger consolidations and trends on a currency chart.

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Jeremy Neal
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951 views

Forex Chart Patterns Part 3: Channels and Rectangles

Channels are formed when prices trend between two parallel lines. A price channel shows the upper and lower boundaries of price movement over time. Channels can be upward sloping (bullish) or downward sloping (bearish). A rectangle pattern forms during a sideways consolidation period, bounded by horizontal lines connecting high and low prices. Breakouts above resistance or below support can signal a resumption of the prior trend. The document provides examples of bullish and bearish price channels and rectangles, demonstrating how smaller patterns can form within larger consolidations and trends on a currency chart.

Uploaded by

Jeremy Neal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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C HANNELS AND RECTANGLES

FOREX CHART PATTERNS PART 3


A FEW EXAMPLES OF SOME PRICE ACTION CHANNELS
Channels
When prices trend between two parallel trend lines they form a channel. When prices hit the bottom trend line, this may be
used as a buying area and when prices hit the upper trend line, this may be used as a profit taking area and vice versa.
Breakouts of trend lines and support and resistance lines provide good areas for buying or selling.
Channels can be upward or downward sloping and horizontal.

1. A few terms for


the word
sideways traders
use are -
consolidation
and range

A price channel is a continuation pattern that slopes up or down and is bound by an upper and lower trend line.
The upper trend line marks resistance and the lower trend line marks support. Price channels with negative
slopes (down) are considered bearish and those with positive slopes (up) bullish. For explanatory purposes, a
“bullish price channel” will refer to a channel with positive slope and a “bearish price channel” to a
channel with negative slope.
CONTINUATION PATTERNS

Rectangle – Bullish In An Up-Trend


When the market is flat, draw a line through the highs and a line through the lows. Buy when the market closes above the
straddle. Sometimes, there will be a bull trap and the market will break back into the rectangle and below the support line.

1. The market will


either be trending
or making
sideways
movements
(consolidation)

2. A sideways market
can mean either
there will be a
continuation or a
reversal in the
market/Trend
HERE WE HAVE AN EXAMPLE OF A CONTINUATION IN THE BULLISH TREND
HERE WE HAVE AN EXAMPLE OF A CONTINUATION IN THE BEARISH TREND
ANOTHER EXAMPLE OF A PRICE ACTION PATTERN
1 Main Trend Line: It takes at least two points to draw the main trend line. This line sets the tone for the trend and the slope.
For a bullish price channel, the main trend line extends up and at least two reaction lows are required to draw it. For a bearish
price channel, the main trend line extends down and at least two reaction highs are required to draw it.




2 Channel Line: The line drawn parallel to the main trend line is called the channel line. Ideally, the channel line will be based
off of two reaction highs or lows. However, after the main trend line has been established, some analysts draw the parallel
channel line using only one reaction high or low. The channel line marks support in a bearish price channel and resistance in a
bullish price channel.




3 Bullish Price Channel: As long as prices advance and trade within the channel, the trend is considered bullish. The first
warning of a trend change occurs when prices fall short of channel line resistance. A subsequent break below main trend line
support would provide further indication of a trend change. A break above channel line resistance would be bullish and
indicate an acceleration of the advance.




4 Bearish Price Channel: As long as prices decline and trade within the channel, the trend is considered bearish. The first
warning of a trend change occurs when prices fail to reach channel line support. A subsequent break above main trend line
resistance would provide further indication of a trend change. A break below channel line support would be bearish and
indicate an acceleration of the decline.


On the next example in the next page we can see one big channel with many smaller
patterns inside of the channel, in trading you will find bigger patterns that have smaller
patterns forming inside of them all depending on the time frame.
SMALLER PATTERNS INSIDE OF A BIGGER PATTERN
HERES ONE LAST EXAMPLE OF SOME OF THE PATTERNS ALREADY DISCUSSED IN THIS SERIES.

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