What is a Channel?

A channel may refer to a distribution system for businesses or a trading range between support and resistance on a price chart.

Key Takeaways

  • A channel may refer to a distribution system for businesses or a trading range between support and resistance on a price chart.
  • Distribution channels describe the method by which a product moves from producer to consumer.
  • A price channel is a chart pattern that graphically depicts the peaks and troughs of a security's price over a period of time.

Understanding a Channel

A channel in finance and economics can either mean a:

  • Distribution channel, which is a system of intermediaries between the producers, suppliers, consumers, etc., for the movement of a good or service.
  • Price channel, which is a trading range between support and resistance levels that a security's price has oscillated within for a specific period of time.
Channel Image

Distribution Channels

Distribution channels describe the method by which a product moves from producer to consumer. These channels vary considerably in complexity depending on the product. Producers selling their products directly to a consumer (like a farmer selling their goods at a farmers market) is the most basic type of distribution channel. 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 the distribution channel increases the cost of getting the product to the consumer. Reducing the steps of a distribution channel is a common way for businesses to reduce expenses.

Not all channels move directly toward consumers. Some, such as a business-to-business marketing channel, involve transactions between two companies. For example, a technology company may manufacture an internal item, such as a computer chip and sell that product to other manufacturers that use it to assemble hardware components.

Price Channels

A price channel is a chart pattern that graphically depicts the peaks and troughs of a security's price over a period of time. If there is an observable symmetry in the oscillation, then it is considered to be a valid price channel that can be used as a tool for stock analysis. Market technicians suggest that at least four points of contact are required (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 is fluctuating between consistent highs and lows, a trader can use a channel to predict price peaks and troughs. For example, a trader could buy a stock when the price touches the lower channel line and set a profit target at the upper channel line. 

Using channels is best suited for moderately volatile stocks that experience regular oscillations. Traders consider an upward breakout from a channel as bullish and a downward breakout as bearish. Temporary price spikes above and below a price channel are common, therefore, other indicators should be used to confirm a breakout. Channels lose their relevance as a predictive indicator when prices breakout from the pattern.