What Is a Horizontal Channel?

Horizontal channels are trendlines that connect variable pivot highs and lows to show the price contained between the upper line of resistance and lower line of support. A horizontal channel is also known as a price range or sideways trend.

Key Takeaways

  • Horizontal channels are trendlines that connect variable pivot highs and lows.
  • In a horizontal channel, buying and selling pressure is equal and the prevailing direction of price is sideways.
  • A horizontal channel provides traders with precise points for entering and exiting trades.
Image depicting a horizontal channel.
StockCharts.com.

Understanding a Horizontal Channel

A horizontal channel or sideways trend has the appearance of a rectangle pattern. It consists of at least four contact points. This is because it needs at least two lows to connect, as well as two highs. Buying and selling pressure is equal and the prevailing direction of price action is sideways. Horizontal channels form in periods of price consolidation. Price is framed out in a trading range by the pivot highs (resistance) and pivot lows (support). Trend lines are drawn on pivots to give a visual picture of price action. A new high in the price above the horizontal channel is a technical buy signal. A new low in price below the horizontal channel (or rectangle pattern) is a technical sell signal.

The horizontal channel is a familiar chart pattern found on every time frame. Buying and selling forces are similar in a horizontal channel until a breakout or breakdown occurs. The horizontal channel is a powerful yet often overlooked chart pattern. It combines several forms of technical analysis to provide traders with precise points for entering and exiting trades, as well as controlling risk.

How to Locate Horizontal Channels

  1. Manually look through charts to locate channel patterns.
  2. Utilize stock screeners, such as Finviz.com, or a service that automatically recognizes channel patterns.
  3. Subscribe to a service that provides a daily list to chart patterns.

There are three types of channels: Channels that are angled up are called ascending channels. Channels that are angled down are called descending channels. Ascending and descending channels are also called trend channels because the price is moving more dominantly in one direction.

Buying or Shorting a Horizontal Channel

Horizontal channels provide a clear and systematic way to trade by providing buy and sell points. Here are the trading rules for entering long or short positions.

  • When the price hits the top of the channel, sell your existing long position and/or take a short position.
  • When the price is in the middle of the channel, do nothing if you have no trades open, or hold onto your current trades.
  • When the price hits the bottom of the channel, cover your existing short position and/or take a long position.

Practical Example of Trading a Horizontal Channel

Elevate Credit Inc. shares have traded with a horizontal channel since gapping lower on Oct. 30, 2018. Over this period, traders have had the opportunity to short sell the stock at the channel’s upper resistance line three times (red arrows). Conversely, traders have had the chance to buy the stock at the channel’s lower support line on three occasions (green arrows). Stop-loss orders sit just above the channel’s upper resistance line for short positions and just beneath the lower support line for long positions, while profits are simply taken at the opposite side of the channel.

Image depicting an example of a horizontal channel.
StockCharts.com.