What is a Price Channel
A price channel is used in technical analysis to chart the price action of a security between two parallel lines.
BREAKING DOWN Price Channel
A price channel can be upward or downward trending. It may also be trending sideways with no clear upward or downward trend.
Forces of supply and demand affect the price of a security and can cause it to create a prolonged price channel. The dominance of one force creates the price channel’s trending direction. Price channels can occur over various timeframes. They can be created by all types of instruments and securities including futures, stocks, mutual funds, exchange-traded funds (ETFs) and more.
A price channel is created from technical development of two parallel lines. The lower trendline is drawn when the price pivots higher and the upper trendline is drawn when the price pivots lower. The steepness of declines and the resistance the security meets at the lower trendline determine the direction of the price channel trend.
An upward trending price channel will have trendlines with a positive slope indicating that the price is trending higher with each price change.
A downward trending price channel will have trendlines with a negative slope indicating that the price is trending lower with each price change.
The two lines of a price channel represent support and resistance. Support and resistance lines can provide signals for profitable investment trades.
Price Channel Analysis
Overall, there are potentially a few ways to benefit from price channel technical analysis. Investors using both long positions and short positions have the greatest opportunity to gain when a security follows a clearly delineated price channel path.
Profiting from uptrends relies on long buy positions in a security. Therefore, the investor can likely expect a security to increase when reaching the lower bound, thus providing for a buy position at a discount price. In an upward trending price channel a bullish investor may want to keep their holdings at the upward bound in anticipation of an even higher price. If the security appears likely to remain within its price channel, selling out or taking a short position at the upward bound can be profitable.
A downward trend can also create potential signals for profits however trading from a downward trend is generally more complex. In a downward trending price channel, investors would want to short the stock at the upper bound and take an even deeper short position if it appears likely to cross further below its lower bound. Short-term long positions from the lower bound may be profitable if the investor expects price action to remain within the pre-determined price channel.