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When price trends upward or downward
and fits between two parallel trendlines, the chart pattern is called a channel. See
rectangle tops or
rectangle bottoms for horizontal
channels.
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Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
The price trend leading to
the channel can be from any direction. |
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Shape |
A pipe tilted up or down,
but not horizontal. See rectangle tops or rectangle bottoms for horizontal channels. |
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Trendlines |
The two trendlines should
be parallel or nearly so. Both should tilt upward or both should tilt downward. |
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Touches |
Price should touch each trendline
at least twice as distinct peaks or valleys. |
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Crossing |
Price should cross the pattern
from trendline to trendline, nearly filling the available space. |
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Breakout |
Occurs when price closes outside
the trendline boundary and can be in any direction. |
Trading Tips
I haven’t studied channels for performance (statistics).
My feeling is that they are a lot like rectangles. Just after you enter the perfect
trade, price moves in a different direction and you take a loss.
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Characteristic |
Discussion |
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Up sloping channels |
Refer to the up channel chart on the upper right. Trade up channels
from the long side. Buy when price rebounds at
the bottom trendline (point A) and hope the breakout
is upward (this works for tall channels). If price turns at the top trendline
(B),
then sell. Avoid going short in an up-sloping channel. If price pierces the
channel, such as it does in the figure, then sell a long position or consider going
short then. For position traders, ride the channel up from the bottom and sell if
the breakout is downward from the channel (see the Buy
and Sell notations in the figure. |
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Down sloping channels |
Refer to the down-sloping channel figure on the right.
Trade down channels from the short side. Short when price turns down at the top
trendline (point A) and be ready to cover as
price nears the bottom trendline (B). Avoid going long
when price is inside a down-sloping channel. For position traders, short at the
top of the channel (Sell in the figure), and cover
when price breaks out upward from the channel (Buy).
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Partial rise |
If you can determine that a partial rise has formed, then trade it. Expect the breakout to be downward. The link to the left provides more information. |
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Partial decline |
If you can determine that a partial decline has formed, then trade it. Expect the breakout to be upward. The link to the left provides more information. |
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Stops |
If price closes outside the
channel in the adverse direction, then close out the trade and consider trading in the direction of the new trend. |
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 Up Channel
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 Down Channel
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Example
The above figure shows an example of an upward price channel. Price makes a strong up move in December, and then forms a channel
at a shallower angle than the prior ascent. That momentum loss is a warning. When price closes below the bottom of the
channel, that is the sell signal. Price drops rapidly before beginning a slow recovery.
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