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A trend channel, also sometimes called a price channel occurs channel and trend lines the price is moving between two parallel trendlines. Trading channels can be drawn on charts to help see uptrends and downtrends.
In a bullish trend, the trend line is plotted below the price action, while the trend channel line is positioned above the highs of the price movement. In a bearish trend, the trend line is plotted above, while the trend channel line is below the price action.
An entry signal is given when the price tests the trend line without violating it.
When this happens, the trade is entered in the direction of the trend with a stop loss placed just below the trend line. The opposite trend line can be used as a price target at which to take profit.
For example, in an ascending channel, traders may use the test of the LOWER trend line as an entry for a trade with the trend.
A long position is entered with a stop loss placed just below the lower trend line. The upper trend line can used as the profit target. Trend channel lines most often generate countertrend entry signals, since they act as a resistance in uptrends and support in downtrends.
For example, in an ascending channel, aggressive traders may use the test of the UPPER trend line as an entry for a trade against the trend countertrend.
A short position is entered with a stop loss placed just above the upper trend line. The lower trend line can used as the profit target.
- Trendlines and Channels Important: This page is part of archived content and may be outdated.
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Types of Channels Parallel lines form trend channels, which just as the trend itself can be ascending, descending, or sideways ranging. When the slope of the trend line and trend channel line transition from being parallel, to being divergent, the trend channel forms an ascending triangle. Helpful External Links.