RiskPicksWhat is a Channel?
A channel is a price range defined by two parallel trendlines. The upper line connects the highs and the lower line connects the lows. Price bounces between these two lines until it breaks out of the channel.
Types of channels
- Ascending channel: both lines slope upward. The stock is in an uptrend, making higher highs and higher lows within the channel. Buy at the lower line, sell at the upper line
- Descending channel: both lines slope downward. The stock is in a downtrend. Short at the upper line, cover at the lower line
- Horizontal channel (range): both lines are flat. Price bounces between support and resistance. Buy support, sell resistance, or wait for a breakout
Trading channels
- Trade the bounces: buy when price touches the lower line (support), sell or short when it touches the upper line (resistance)
- Trade the breakout: when price breaks above an ascending channel, it often accelerates. When it breaks below, the trend may be reversing
- Volume confirms: a breakout on heavy volume is more reliable than one on light volume
- Measured move: after a breakout, the expected move is roughly equal to the width of the channel
Channels give you clear entry points, exit points, and invalidation levels. If you can identify the channel, you know where to buy, where to sell, and where to admit you were wrong.