In forex markets, price channels trading is a set of strategies which is based on the traditional trend line idea. The difference with respect to a typical trend line is that, instead of drawing a simple and single line, price channels require to draw both an upper and a lower line. Forex traders are able to capture buy/sell signals when a currency pair breaks out of the upper or lower lines. This technique is often combined with the support/resistance one and candlestick patterns, in order to increase the trading profitability. It requires some experience and some ability to analyze the forex market structure.
The most frequently used price channel techniques are: Fibonacci; Linear Regression; Equidistant channels; Standard Deviation.
The channels are plotted like normal trend lines, with two consecutive swing lows or highs. Fibonacci, regression channels and standard deviation techniques require only two lows or highs. Otheriwise, equidistant channels require a low/high/low or high/low/high sequence.
In the Fibonacci channels case , each of the channel lines represents support/resistance levels. The linear regression channel is drawn the same way of connecting two consecutive highs or lows. It plots the channel to best fit the currency pair trend.
The standard deviation channels are plotted based on 1 or 2 (or more) standard deviations (a well-know dispersion index used in statistics). They measure by how much price deviates from the channel, or, in other words, by how many standard deviation units.
Equidistant channels are the simplest of all channel tools and measure the equal distance within the trend from the highs and lows.