What is 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.

BREAKING DOWN Horizontal Channel

This horizontal channel or sideways trend is also a rectangle pattern (dotted lines show the pattern). Buying and selling pressure is equal and the prevailing direction of price is sideways. This happens 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. It’s found on every time frame. Buying and selling forces are similar in a horizontal channel and only the breakout of one of the two bands will show an advantage to one of them. 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.

A channel consists of at least four contact points. This is because we need at least two lows to connect to each other, and two highs to connect to each other. 

How to Locate Horizontal Channels

  1. Manually look through charts to locate channel patterns.
  2. Utilize software or a service that automatically recognizes channel patterns.
  3. Subscribe to a company that provides you with a list of equities to which this technique can be applied

There 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

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, 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.