One of the forex trading market’s many variations on continuation, a price channel is formed when a currency pair range-trades between rising or falling support and resistance levels.

A bullish price channel has an uptrend and is defined by its support level, e.g., by drawing a trend line from the lowest low preceding the trend and continuing up beneath the series of candlesticks or price bars. At least two “touches” by reaction lows are required and more are preferred as confirmation of the channel. A parallel line is drawn above the series to mark the resistance level and it is considered the channel’s price target.

On the other hand, a bearish price channel has a downtrend and is defined by a resistance line drawn from the highest high preceding the trend, down along the top of the series of candlesticks or price bars, again, with at least two touches required and more preferred as confirmation of the channel. The parallel support line is drawn beneath and is considered the channel’s target.

Price channels vary a good deal and they are not considered strong indicators. Not all have support and resistance that are precisely parallel, although that is preferred. Many times a currency pair lacks respect for its price channel boundaries, spiking above resistance or below support, only to withdraw back between its lines. Because of this, each technical trader when drawing a channel must consider the best placement for the boundary trendlines, determining their location and relevance based upon trading experience.

Below is an example of a bullish price channel. This is the current daily chart for AUD/NZD:

Because this is a bullish price channel, its origination point is support at 1.1334 (the purple horizontal line at the bottom of the illustration) reached on 25 March 2008. The support line (medium green) is touched twice, once on 30 May and again 16 July. The resistance line (yellow) is traced roughly between 8 and 22 May then reached again on 10 June. On 24 July the currency pair could not force its way through horizontal resistance at 1.2966 (also purple, at the top of the illustration). On 31 July the heikin ashi price bar touched support again, then on 4 August it closed beneath support and the channel was broken.

When a currency pair’s price action consistently falls short of reaching its goal, it becomes an early warning alert of a possible incipient reversal. As shown above, during June and July, when AUD/NZD could not reach the resistance level (the target for a bullish price channel), it indicated the trend was losing momentum and enthusiasm. The actual break beneath the channel, however, was due to changes in the Australian dollar’s fundamentals, as the Reserve Bank of Australia clearly signalled a future relaxation of monetary policy and lower interest rates.

The obvious method of trading a price channel is to buy at support and sell at resistance, as is commonly done in range trading. However, as the illustration above shows, the technique is not without risk. As with any forex trading strategy, confirmation for a potential trade should be obtained through technical indicators prior to entering the market.