Price Channels

A price channel is formed by two parallel lines that contain price as it trends: a trend line along the swing lows and a parallel line along the swing highs. Channels show the direction of a trend, its typical range of movement and likely areas to buy, take profit or watch for a breakout. They can slope up, slope down or run horizontally.

Types of channels#

How to draw a channel#

1. Draw the main trend line through at least two swing lows (uptrend) or swing highs (downtrend). See Trend Lines.
2. Copy it as a parallel line and place it on the opposite swing points: the highs in an uptrend, the lows in a downtrend.
3. Check for touches: a good channel has reactions on both lines.
4. Adjust if needed, but avoid forcing lines through every wick.

Most charting platforms have a parallel channel tool that draws both lines at once.

Trading inside a channel#

• With the trend: in an ascending channel, buy near the lower line with a stop below it, and take profit near the upper line.
• Against the trend: shorting the upper line of an ascending channel is a counter trend trade with lower odds; many traders avoid it or use small targets.
• Middle of the channel: often a poor place to enter, since reward and risk are both moderate.

Channel breakouts#

When price closes outside a channel, the trend's character has changed:

• Break in the trend direction (above an ascending channel): the trend may be accelerating. Sometimes this marks a blow off top, so watch for quick reversals.
• Break against the trend (below an ascending channel): the trend is weakening. Price often retests the broken lower line from below. See Role Reversal and Retests.
• Measured move: a common guide projects the channel's width beyond the breakout point as a first target.

Channels from indicators#

Indicator based channels draw bands automatically rather than through swing points:

• Donchian Channels use the highest high and lowest low over a period. See Donchian Channels.
• Keltner Channels use a moving average plus or minus a multiple of ATR. See Keltner Channels.
• Bollinger Bands use a moving average plus or minus standard deviations. See Bollinger Bands.

Common mistakes#

• Forcing a channel onto choppy price action.
• Fighting the trend by shorting every touch of an ascending channel's upper line.
• Ignoring breakouts because the channel "worked" for so long.
• Drawing on too low a timeframe, where channels form and fail quickly.

Frequently asked questions#

What is a price channel in trading?#

Two parallel lines containing price as it trends, one along the swing lows and one along the swing highs.

How do you trade a channel?#

Commonly by buying near the lower line in an ascending channel or selling near the upper line in a descending channel, with stops just outside, and taking profit at the opposite line.

What does a channel breakout mean?#

That price has moved outside its usual range, suggesting the trend is accelerating, weakening or changing.

Next, learn how to trade the moment price leaves a range in Breakouts.