Channel

DEFINITION of 'Channel'

A channel in finance and economics can either mean:

1. The system of intermediaries between the producers, suppliers, consumers, etc., for the movement of a good or service.

2. The technical range between support and resistance levels that a stock price has traded in for a specific period of time.

Channel

BREAKING DOWN 'Channel'

Distribution Channels

The most basic kinds of channels for products or services are distribution channels, which describe the method by which a product moves from producer to consumer. These channels vary considerably in complexity depending on the product. In the simplest channel, the producers sell their own products directly to a consumer (like a farmer selling their own wares at a farmer's market). Other channels are much more complex, with products sometimes passing from producers to brokers to wholesalers or retailers before finally reaching the consumer.  Each step of distribution channel increases the costs of distribution. Reducing the steps of a distribution channel is a common way for businesses to cut expenses.

Not all channels move directly towards consumers: business-to-business marketing channels involve transactions between two companies. Oftentimes, especially in technology industries, one company will manufacture an internal item (like a computer chip) and sell that product to other manufacturers, who will use the chip to assemble a more complex product which might be then be sold to consumers.

Stock Price Channels

A price channel for a stock can be drawn by drawing lines connecting the stock price's peaks and lows over a period of time. Price channeling can be a very effective tool for stock analysis. Price channels require at least four points of contact (two each for the upper and lower lines). Price channels can move either upwards, downwards, or stay flat, but the two lines must be approximately parallel.

If a stock has fluctuated between approximately consistent highs and lows, a trader can use channeling to predict price peaks and lows in real time, and trade with that information. Channeling, therefore, is best for moderately volatile stocks which experience regular peaks and troughs.  A breakout of a technical channel is seen as a bullish (on an upward breakout) or bearish signal (on a downward breakout). It is nearly impossible to predict a breakout of a stock from its channel, but if it does happening, channeling loses its relevance as a predictive indicator.

 

 

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