A price channel is a pair of parallel trend lines that form a chart pattern for a stock. When charting the price of an asset, this is the space on the chart between an asset’s support and resistance levels.
The channel is built from two parallel trend lines with the same slope. Channels may be horizontal, ascending, or descending. It is important to note, that a channel is only valid after at least 3 peaks in one trend line, and 2 peaks on the second trend line.
Channels are often used in range trading strategy (also know as channel trading). Range traders will buy an asset when its price is near the bottom of the trading channel and sell it when the price gets close to the top of the trading channel, making a profit on the spread. When share price breaks through support or resistance and maintains momentum, a breakout is said to have occurred.
- For ascending channels, long trades will be taken on the support trend line.
- For descending channels, short trades will be taken on the Resistance trend line.
It is important to adjust support and resistance levels proactively. The advantage of a channel trading strategy is that one can adjust the support and resistance levels regularly in order to identify trends at unestablished levels and get ahead of a breakout.