A trend channel is a set of parallel trend lines defined by the highs and lows of an asset’s price action. A trend channel, also sometimes called a price channel occurs when the price is moving between two parallel trendlines.
Types of Trend Channels
There are three types of channels:
- Ascending channel (higher highs and higher lows)
- Descending channel (lower highs and lower lows)
- Horizontal channel (ranging)
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Ascending channel (higher highs and higher lows)
Ascending channels are trend continuation patterns that have an ascending price action as their main characteristic. They have a bullish market structure.
On the other hand, a descending channel is a bearish continuation pattern with significant implications for the broader scope of the market. Ascending channels are exactly the opposite: they are bullish continuation patterns with significant implications for the market moving forward.
An ascending channel is a series of price highs and lows contained between upward-sloping parallel lines. These trendlines act as resistance and support for the asset price as it advances. The price must touch the support or resistance line at least twice before an ascending channel is confirmed.
- An ascending channel is used in technical analysis to show an uptrend in a security’s price.
- It is formed from two positive sloping trend lines drawn above and below a price series depicting resistance and support levels, respectively.
- Channels are used commonly in technical analysis to confirm trends and identify breakouts and reversals.
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Descending channel (lower highs and lower lows)
A descending channel is drawn by connecting the lower highs and lower lows of a security’s price with parallel trendlines to show a downward trend. Traders who believe a security is likely to remain within its descending channel can initiate trades when the price fluctuates within its channel trendline boundaries.
- A descending channel is drawn by connecting the lower highs and lower lows of a security’s price with parallel trendlines to show a downward trend.
- Traders who believe a security is likely to remain within its descending channel can initiate trades when the price fluctuates within its channel trendline boundaries.
- A more potent signal occurs with a breakout, which is when a security’s price breaches an established channel’s boundaries, either on the upper or lower side.
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Horizontal channel (ranging)
A horizontal channel is a trend line in a trading range, also known as a sideways trend. It reveals precise price points to investors that can systematically guide investors on when to enter or exit a trading position.
- Horizontal channels are trendlines that connect variable pivot highs and lows.
- In a horizontal channel, buying and selling pressure is equal, and the prevailing price direction is sideways.
- A horizontal channel provides traders with precise points for entering and exiting trades.
Important things to remember about drawing trend channels:
When constructing a trend channel, both trend lines must be parallel to each other.
Generally, the bottom of the trend channel is considered a “buy zone” while the top of the trend channel is considered a “sell zone”.
Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw!
A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at a different angle is not correct and could lead to bad trades.
When this happens, this chart pattern is no longer a trend channel but a triangle. (which you will learn about more later).
That said, trend channels don’t have to be completely parallel. Nor does 100% of price action have to fit within the channel.
A common mistake many traders make is that they only look for textbook price patterns.
They miss important information about price action and close their eyes to other important clues.
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