Horizontal Channel
Candlefocus EditorTraders usually employ horizontal channels when they have identified a range or channel in the price action, as opposed to a strong trend. It is important to note that this type of channel may not always indicate trend reversal, it could also indicate a market being in equilibrium, where buyers and sellers are equally pushing the price from opposite directions.
The advantage of the horizontal channel is that it offers the potential to play both sides of the market. The disadvantage however, is that in the absence of a clear direction, the trader may have to exit a trade before it reaches the desirable profit target. This is because the price could easily break out of the channel if either the buyers or sellers become more dominant.
A horizontal channel offers traders precise points for entering and exiting trades. Traders can use the same criteria to identify support and resistance points, as well as the middle point of the channel as areas to initiate buy or sell orders. The middle point of the channel may also be used as a sign of potential reversals. By considering the volatility in a horizontal channel, traders can also use MA’s and other indicators to time their trades for maximum profits.
To summarise, a horizontal channel is a condition of price movement where the underlying asset is neither appreciating or depreciating, but trading within the established support and resistance points. This offers short term traders a range of opportunities, however they must be aware of the limited movement within the boundaries of the band and the risk that the underlying price may break out of the range. Understanding the nuances of a horizontal channel is essential for any successful trader.