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.

 

 

RELATED TERMS
  1. Ascending Channel

    An ascending channel is the price action contained between upward ...
  2. Distribution Channel

    A distribution channel is a chain of businesses or intermediaries ...
  3. Fibonacci Channel

    The Fibonacci channel is a variation of the Fibonacci retracement ...
  4. Fakeout

    Fakeout is a term used in technical analysis to refer to a situation ...
  5. Range-Bound Trading

    Range-bound trading is a trading strategy that seeks to identify ...
  6. Breakout Trader

    A breakout trader is a type of trader who uses technical analysis ...
Related Articles
  1. Trading

    Channeling: Charting a Path to Success

    Learn how to trade channels, a chart pattern that tells you where to enter, where to exit and even how long the trade may take.
  2. Trading

    Buy These Stocks on The Pullback (LEN, FNF)

    These four stocks are in upward sloping trend channels and have recently pulled back toward the bottom of the channel, providing a buying opportunity.
  3. Trading

    Trend Channel Buying Opportunity in These Stocks (ABBV, RTN)

    These stocks are rising within trend channels and flashing a buy signal with the price near channel support.
  4. Trading

    Rising Trend Channel Breakouts - Acceleration Or Top?

    These stocks have been within rising trend channels, but recently have broken the trend channel to the upside. Such a breakout usually signals two potential outcomes: an acceleration of the trend ...
  5. Investing

    Time to Buy These Stocks at Support

    These stocks are moving within well-established trend channels and have recently pulled back toward channel support, presenting a potential buying opportunity.
  6. Trading

    3 Stocks Channeling Higher and In the Buy Zone

    Trending higher overall, and trading near support following a pullback, these stocks are in the buy zone.
  7. Trading

    Trend Channel Stocks Near the Buy Point (WCN, MWA)

    These stocks are currently trading near the bottom of trend channels but moving higher, presenting a buying opportunity.
  8. Trading

    Gold, Silver and Oil Heading Into Resistance

    Gold, silver and oil have bounced recently, but technicals indicate that prices could head lower again.
  9. Trading

    Uptrending Stocks Near Technical Buy Points

    Aflac and Humana are in uptrends but have pulled back to support, providing a potential buying opportunity.
RELATED FAQS
  1. How do traders and analyst create profitable Swing Trading strategies in forex?

    Learn how to create a profitable swing trading strategy in the forex market using price channels on bullish, bearish and ... Read Answer >>
  2. What business structures expose entrepreneurs to unlimited liability?

    Understand the advantages and disadvantages of a horizontal integration. Learn when a company would want to integrate horizontally. Read Answer >>
  3. How are Donchian channels used when building trading strategies?

    Discover how some traders use the Donchian channel method of trend trading, and why Donchian channels work best with a complementary ... Read Answer >>
  4. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
Trading Center