Channel analysis is a more sophisticated approach to predicting the boundaries of trends than simple trend lines. Using channels for your trading can significantly improve you trading, allow you to make more accurate predictions, and, in return, increase your earnings.
What are channels?
Trend lines are a useful tool to predict future price movements. They encounter, however, some limitations: In an upwards trend, a trend line works as a support line that limits the market to the downside. You can use this trend line to predict when the market will turn upwards after a correction again.
When the market is moving up during an upwards trend, however, the trend line will not help you to predict how far the movement will reach. This takes one of the most important indicators to predict the reach of the movement away from you. To make up for this disadvantage, you need a line similar to the trend line that limits the market to the other side. This concept is called channel analysis.
There are two ways you can create a trend channel:
1: You can start with the trend line. After you established the trend line, you draw a line parallel to the trend line that limits the market to the other side. If you create a trend line connecting two lows, your second channel line has to connect two highs. Always make sure both lines are parallel.
2: You can start with the line to the other side of the trend line. In an uptrend, this is the upper channel line, in a downtrend it is the lower channel line. After you established this line your can draw the main trend line as a parallel line to the already established line.
Most traders start drawing their channel with the trend line. The trend line usually is more obvious, since it starts earlier, and can therefore be drawn more accurately.
Advantages of channel analysis
Compared to using just one trend line, channel analysis offers certain distinct advantages that will help you trade binary options more successfully:
1) You will know when trends are over in both ways
After you established a trend channel, you know the area the market should move in. You have established two limitations for a trend: One to the upside, and one to the downside. Therefore, you can not only determine when the main trend line has become irrelevant because the trend has lost momentum; you can also determine when you have to draw a new trend line because the trend has picked up momentum.
In an uptrend, for example, this means a trend can not only end to the downside, but also to the upside. If a trend breaks through the upper channel line, you know that the trend has gained momentum, and that you should not wait for the market to reach the lower trend line again. Very likely the increased momentum will also make the lower trend line steeper.
This is very important information you would miss without a channel based analysis. If you plan on trading touch options based on the range of the swing, for example, different trend line will almost certainly make the difference between a won and a lost trade.
2) You can trade touch options in both ways
Touch options offer a far higher payout than high / low options. When you have the choice, you should therefore choose to trade a touch option over a high / low option. With a simple trend line, you only know how far the market will move during swings to one side. This leaves 50 percent of all opportunities for a high payout unused.
With a trading channel, on the other hand, you can trade touch option to both sides, thereby doubling the opportunities to generate a high payout. Over the time of weeks and months, this can make a big difference, and significantly increase your gains.
In conclusion, trading channel offers significantly more opportunities and allows for more sophisticated market analysis than trading simple trend lines. Therefore, every trade should use channels over trend lines in his technical analysis of financial markets.