What is a 'Trading Channel'

A trading channel is a channel drawn on a security price series chart by graphing two trendlines drawn at resistance and support levels. Trading channels can be drawn using a variety of methodologies. Generally traders believe that security prices will remain within a trading channel. Therefore, traders use trading channels to develop buy and sell trading signals.

A trading channel may also be known as a price channel.

BREAKING DOWN 'Trading Channel'

Trading channels are a key methodology used by technical analysts to create buy and sell signals from technical charts. Technical analysts may follow a variety of patterns that occur within a channel to discern short term directional changes in market prices. Trading channels however provide one of the most important overlays that a technical analyst will use for long term analysis and trading decisions.

There are generally two broad types of trading channels that technical analysts will use: trend channels and envelope channels.

Trend Channels

Trend channels are drawn with defined slope trendlines at the resistance and support levels of a security’s price series. These channels are not used for long-term price analysis since they lack the ability to flow through reversals. Trend channel trading relies heavily on a security’s trend cycle which spans through breakout gaps, runaway gaps and exhaustion gaps. Generally trend channels will be either flat, ascending or descending. 

Flat: Flat channels occur when trendlines have a zero slope. These trend channels show sideways movement in the market with no upward or downward trend.

Ascending channel: An ascending channel is drawn from two positive sloping lines at the resistance and support levels of a price series chart. This channel shows a bullish trend.

Descending channel: Descending channels are the opposite of ascending channels. These channels are formed from two negative sloping trendlines at the resistance and support levels. A descending channel will show a bearish trend.

Envelope Channels

To take into account longer term price movements, traders can also use envelope channels. Envelope channels have trendlines that are drawn based on statistical levels. Two of the most common envelope channels include Bollinger Bands and Donchian Channels.

Bollinger Bands: Bollinger Bands are one of the most popular trading channels incorporating moving average trendlines. In a Bollinger Band trading channel, trendlines at the resistance and support levels are based on movement of the moving average. The resistance trendline is two standard deviations above the moving average. The support trendline is two standard deviations below the moving average.

Donchian Channel: Donchian Channels are a type of envelope trading channel based on high and low prices. The resistance trendline in a Donchian Channel is drawn based on the security’s high over a specified period (n). Adversely the support line is drawn based on the security’s low over a specified period. Traders can use various periods to create Donchian Channels. Typically resistance and support trendlines will be defaulted to a 20 day period.

Trading Channel Indicators

Traders using trading channels to generate buy and sell orders will typically trade based on the notion that a security’s price is expected to remain within the trading channel. This methodology can require more careful diligence in trend channels since reversals may occur. In both trend channels and envelope channels, traders typically choose to buy at the support trendline and sell at the resistance trendline.

RELATED TERMS
  1. Descending Channel

    A descending channel is used in technical analysis to show a ...
  2. Buy Weakness

    Buy weakness is a proactive trading strategy in which a trader ...
  3. Price Channel

    A price channel is used in technical analysis to chart the price ...
  4. Trending Market

    A trending market is a market that is trending in a specific ...
  5. Envelope Channel

    An Envelope Channel is a series of technical indicators used ...
  6. Ascending Channel

    An ascending channel is the price action contained between upward ...
Related Articles
  1. Trading

    Enterprise Products Bouncing Up and Down (EPD)

    EPD is making some very predictable moves momentum traders can profit from.
  2. Trading

    Commodity Stocks Still Presenting Buying Signals

    A handful of commodity stocks continue to offer short-term trading opportunities as they move higher within a trend channel.
  3. 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.
  4. Trading

    Commodity Stocks With Buy Signals

    These commodity-related stocks are in uptrends and currently near support, providing a buying opportunity.
  5. Trading

    Uptrending Stocks Near Technical Buy Points

    Aflac and Humana are in uptrends but have pulled back to support, providing a potential buying opportunity.
  6. Investing

    Amazon on the Hunt for Small TV Channels: Report

    The Seattle-based e-commerce giant wants to create a platform catering to niche programming.
  7. Trading

    Trending Stocks Still Giving Buy Signals (XRS, TSM)

    These upward trending stocks are near entry points right now.
  8. Investing

    4 Big Stock Gainers: Hold or Sell?

    These four stocks saw big moves higher on March 17. Is it time to take profits or hold out for more. Here's what the charts say.
RELATED FAQS
  1. What is the difference between a direct and an indirect distribution channel?

    Learn about the primary differences between direct and indirect distribution channels, and under what circumstances a company ... Read Answer >>
  2. 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 >>
  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 is a common strategy traders implement when using the Moving Average (MA)?

    Learn about a basic moving average strategy predicated on the relationship between a security's price action and its moving ... Read Answer >>
  5. 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 >>
  6. How are Bollinger Bands® used in forex trading?

    Use Bollinger Bands in forex trading to identify entry and exit points with ranging trends or to spot increasing volatility ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center