Horizontal Channel

A trend line in a trading range that moves sideways

What is Horizontal Channel?

A horizontal channel is a trend line that connects the variable pivot highs and lows to highlight the price movements during a trading period. Otherwise known as a sideway trend or price range, horizontal lines are theoretically used by traders for breakouts to determine where price action is decisive. Channels are forms of vertical support and resistance in which price faces trouble either rising above or sinking below.

 

Horizontal Channel
Source

 

Summary

  • A horizontal channel is a trend line in a trading range that moves sideways.
  • It reveals the price movements at critical levels immediately to investors; hence it systematically guides investors on how to trade favorably.
  • In charts, a horizontal channel’s top trend line becomes the support line, while the bottom line becomes the resistance line to help in the analysis.

 

Understanding Horizontal Channels

A horizontal channel is a guise of trend lines with a rectangular pattern. By definition, a horizontal channel includes four contact points since it needs at least two lows and two highs. It also comprises equal buying and selling pressure with a sideways direction of price action.

A horizontal channel’s trends breakout occurs during price consolidation, a period when the trade is limited within specific price ranges and characterized by few trading opportunities. The resistance (pivot low) and the support (pivot high) frame out the price movement in a trading session.

The passing trend lines on pivots show the visual picture of price in action. The paths enable the trader to see the gradual fall or rise of price over time. A new high and a new low represent a buy signal in the price above the horizontal channel and a sell signal in the price below the horizontal channel, respectively.

 

Locating a Horizontal Channel in a Graph

A horizontal channel is a common chart pattern in every trading period. The opposing forces of buying and selling are similar until a breakdown suffices. Although a horizontal channel is a powerful trend indicator, it is a commonly underutilized chart pattern.

Its high probability results combine with some technical analysis elements and enable traders to make a trading decision when the odds are in their favor. There are three ways traders can use to locate horizontal channels in a graph.

  1. Traders can locate the channel manually by looking at the graph.
  2. Traders can utilize stock screeners to recognize a horizontal channel.
  3. Traders can subscribe to service providers who compile chart patterns daily.

 

Apart from the horizontal channel, there are two other channels – ascending and descending channels.

 

1. Ascending Channel Trading Pattern

The ascending channel trading pattern is also called a bullish price channel and is a continuation with a positive slope. The slopping parallel lines contain the price actions and show a clearly defined uptrend. Traders can keep opening long positions as long as the stocks’ price remains within the upper and lower channels’ trend line.

 

2. Descending Channel Trading Pattern

The descending channel trading pattern is also referred to as a bearish price channel trading pattern. The bear market continues as long as the stocks’ price actions follow the down-trending channel’s trend lines. However, trading stops when there is a breakout on the resistance line that makes a new high.

 

Using Support and Resistance to Analyze a Horizontal Channel

 

Horizontal Channel - Support and Resistance Levels

 

Trend channels utilize parallel trend lines. In chart analysis, the top channel’s trend line becomes a potential resistance level, while the bottom trend line becomes the support level. Technical investors use support and resistance levels as one of the main areas of focus in chart analysis.

The advantage of a horizontal channel is that it promptly reveals the price movements at critical levels to an investor. Thus, the support and resistance become viable points in a horizontal channel. A horizontal channel can be created using technical analysis indicators that smooth out price action, such as trend lines, moving averages, or Fibonacci retracement levels.

Traders use the buy and sell points within a horizontal channel as the guide to clear and systematic trading. Investors can observe the following rules for entering the long and short positions:

  • Take a short position when the stocks’ price reaches the top of a channel’s trend line.
  • Hold onto current trade and do nothing when the stocks’ price movement is within the middle of the channel’s trend lines.
  • Take a long position when the price of stocks reaches the bottom of the trend line.

 

Special Considerations

A horizontal channel is even more profitable to investors when the candlestick signal information is incorporated. Price movements that occur at the support and resistance levels enhance the accuracy of a horizontal channel.

A horizontal channel also becomes a useful tool for investors when expecting the next target. It determines how worthwhile the next trading period will be in addition to showing the investor sentiment by looking at the past trading range.

 

Additional Resources

CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Advanced Technical Analysis
  • Donchian Channels
  • How to Read Stock Charts
  • Three Best Stock Simulators

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