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Channels are useful because you can
spot breakouts on either direction of the trend. The approach is similar to how
we approach trend lines in that we wait for the price to reach one of the
channel lines and look at the indicators to help us make our decision.
Notice that the MACD was showing
strong bearish momentum as EUR/USD broke below the lower line of the trend
channel. This would’ve been a good sign to go short!
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Another way to spot breakout opportunities is to draw trend
channels. Drawing trend channels are almost the same as drawing trend lines
except that after you draw a trend line you have to add the other side.
When drawing trend lines it is
best if you can connect at least two tops or bottoms together. The more tops or
bottoms that connect, the stronger the trend line.
So how can you use trend lines to
your advantage? When the price approaches your trend line, only two things can happen.
The price could either bounce off the trend line and continue the trend OR
price could breakout through the trend line and cause a reversal. We want to
take advantage of that breakout!
Looking at the price is not enough
however. This is where using one or more of the indicators mentioned earlier in
this lesson could help you tremendously.
Notice that as EUR/USD broke the
trend line MACD was showing bearish momentum. Using this information we can
safely say that the breakout will continue to push the euro down and as
traders, we should short this pair
The first way to spot a possible
breakout is to draw trend lines on a chart. To draw a trend line you simply
look at a chart and draw a line that goes with the current trend.
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