The equidistant channel has become one of my favorite technical patterns to trade. It’s formed by two parallel levels of support and resistance. The equidistant channel can be bullish (ascending) or bearish (descending) depending on the direction of the trending price action.
In this lesson, we’ll take a look at both the ascending and descending channels. We’ll cover how to identify these patterns as well as the best way to trade them. We’ll wrap things up with a way that I like to use this pattern on the weekly chart to help form a directional bias on the lower time frames.
Let’s get to it!
What is an Equidistant Channel?
Before we discuss how to trade this pattern, we first need to understand the characteristics that give it life.
The equidistant channel is formed when price action finds support and resistance between two parallel trend lines. Although the name sounds complicated, the term “equidistant” can be translated as, “of equal distance”. This refers to the parallel trend lines that are an equal distance apart from one another.
Let’s first take a look at an ascending equidistant channel. This is also known as a bullish channel as the trend is up.
Notice in the illustration above, we have a market that is making higher highs and higher lows. This represents an ascending equidistant channel.
Now let’s take a look at a channel that’s trending down.
Notice how in this illustration the market is making lower highs and lower lows. This is an example of a descending equidistant channel.
The Best Way to Identify Equidistant Channels
Like all things when it comes to trading Forex, becoming good at something takes practice. Learning to quickly identify, and profit from, channeling price action is no different.
That said, it’s relatively easy to identify an equidistant channel once you know what to look for. The best way is to simply find a clean trend line and then look to see if a parallel trend line is also being respected by the market. In other words, if you know how to draw trend lines, you know how to find equidistant channels.
Let’s take a look at an example.
Notice in the GBPNZD 4 hour chart above, we have a clearly defined level of support in the form of a trend line. This level would have been fairly easy to spot, even for the untrained eye.
Now that we have our support level drawn, we can begin to look for a parallel resistance level. Let’s see if something lines up…
Note how the price action above is not only finding support at the trend line we previously identified, but it’s also finding resistance at a trend line of equal distance to support.
Now that we’ve identified the equidistant channel, we can begin looking for price action signals within the pattern.
Using Equidistant Channels to Find Trade Setups
The first thing you want to know about finding trade setups within an equidistant channel is that you always want to try to trade with the trend. A channel is essentially just a trending market, so the same rules apply when it comes to trading with the momentum.
This is true so long as the market remains within the channel. There are exceptions to this rule, which we will take a look at later in the lesson.
Let’s take another look at the GBPNZD example to see if we can find a bullish signal at support.
Notice how in the chart above, after two touches off of support, the market formed a bullish pin bar. This pin bar formed within the uptrend of the equidistant channel and therefore represents a valid buying opportunity.
The logical target for this trade was channel resistance, which took the market 3 days to reach.
Note: This trade endured a significant pullback along the way. However, it was still extremely profitable for the disciplined trader.
Speaking of being profitable, let’s see what this trade amounted to in terms of a risk to reward ratio.
In the trade setup above, the bullish pin bar required an 80 pip stop from the entry to the stop loss placement. The profit target on the other hand, which was channel resistance, was approximately 420 pips away.
The risk to reward ratio for this trade setup was 1:5.25 (420 / 80). Put another way this was a 5.25R trade. So if you had risked $100 you would have made $525 ($100 x 5.25). Not bad for a trade that took just 3 days.
The Exception to the Rule
Remember how I mentioned that there is an exception to trading with the trend?
Equidistant channels can be great for finding trade setups within the channel, but what happens with the market breaks support or resistance?
When this happens, we can essentially treat it similar to the Forex breakout strategy. This means that we’re watching for a break of support or resistance with the intent of trading in the direction of the break.
It should be noted that these breaks are best traded as follows:
- Ascending (bullish) channel – look for a break of channel support
- Descending (bearish) channel – look for a break of channel resistance
Let’s take a look at a break of channel support that occurred during an ascending equidistant channel.
In the chart above, GBPNZD broke channel support at the week open. The market then trended higher to retest former channel support, which acted as resistance.
This trade is still in progress, but an entry short from the retest of former support would have netted you more than 500 pips. This is the power of using a simple price action pattern in combination with a higher time frame such as the 4-hour chart.
See the Forex breakout strategy lesson to learn more about this style of trading.
Using Channels to Form a Directional Bias
Another way to use an equidistant channel is to form a directional bias for a particular market. This is achieved by applying the channel to a higher time frame such as the weekly chart.
The chart above shows the AUDUSD weekly chart. The pair is currently moving within an equidistant channel with a 1,000 pip range.
This is important because it allows us to form a bullish or bearish bias depending on where the market is within this channel. A move down to channel support would have us looking for a potential reversal on the daily time frame.
Alternately, a move below channel support would have us looking lower, while a move above channel resistance would have us searching for long opportunities on the daily chart.
Think of using equidistant channels in this way as another tool by which you can shift the odds in your favor. If you know where a market is likely to move on a weekly basis, it becomes much easier to trade with the trend on the daily and 4 hour time frames.
I hope this lesson has shed some light on equidistant channels, including how to identify these patterns as well as how to trade them. Remember that you can also use this pattern on the weekly time frame to form a medium to long-term directional bias.
Let’s recap some of the important points from the lesson.
- The term “equidistant” can be translated as, “of equal distance”
- An equidistant channel is formed by two parallel trend lines – one acts as support while the other acts as resistance
- The best way to identify the pattern is to start by drawing one trend line and then see if a parallel level matches the price action on the chart
- Always try to trade with the direction of the equidistant channel as long as the market remains inside the pattern
- Look for bullish price action in an ascending channel and bearish price action in a descending channel
- A break of support or resistance can lead to a trade setup with the intent of trading in the direction of the break
- For breakouts, look for a break of support for ascending channels and a break of resistance for descending channels
- An equidistant channel on the weekly chart can help you form a directional bias on the daily and 4-hour charts
Do you use equidistant channels in your trading? If so, how do you use them?
Share your experience below, ask a question or simply leave a comment. I always take the time to respond.