What is a horizontal channel?
Horizontal channels are trend lines connecting variable pivot highs and lows to show the price contained between the upper resistance line and the lower support line. A horizontal channel is also known as a price range or a lateral trend.
- Horizontal channels are trend lines connecting variable pivot highs and lows.
- In a horizontal channel, the buying and selling pressure is equal and the predominant price direction is lateral.
- A horizontal channel provides traders with precise points to enter and exit trades.
How a horizontal channel works
A horizontal channel or side trend has the appearance of a rectangular pattern. It consists of at least four points of contact. This is because you need at least two minimums to connect, as well as two maximums. The buying and selling pressure is equal and the predominant direction of the price action is lateral. Horizontal channels are formed in periods of price consolidation.
The price is framed in a trading range by the highs of the pivot (resistance) and the lows of the pivot (support). Trend lines are drawn on pivots to give a visual picture of price action. A new high in price above the horizontal channel is a technical buy signal. A new low price below the horizontal channel (or rectangle pattern) is a technical sell signal.
There are three types of channels: horizontal, ascending and descending channels. Channels that are angled upward are called riser channels. Channels that are angled downward are called downward channels. Ascending and descending channels are also called trend channels because price moves more dominatingly in one direction.
The horizontal channel is a familiar chart pattern found in every time frame. Buy and sell forces are similar in a horizontal channel until a breakout or collapse occurs. This type of channel combines various forms of technical analysis to provide traders with precise points to enter and exit trades, as well as to control risk.
A horizontal channel is a powerful but often overlooked chart pattern.
To identify horizontal channels:
- Manually examine the charts to locate channel patterns.
- Use action filters, such as Finviz.com, or a service that automatically recognizes channel patterns.
- Subscribe to a service that provides a daily list of chart patterns.
Trading a horizontal channel
Horizontal channels provide a clear and systematic way to trade by providing buy and sell points. These are the trading rules for entering long or short positions.
- When the price reaches 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 open trades, or hold your current trades.
- When the price reaches the bottom of the channel, cover your existing short position and / or take a long position.
Horizontal channel example
Elevate Credit, Inc. (ELVT) shares have traded within a horizontal channel since declining on October 30, 2018. During this period, traders have had the opportunity to short the shares at the resistance line. channel three times (red arrows). In contrast, traders have had the opportunity to buy shares at the channel’s lower support line three times (green arrows). Stop loss orders are placed just above the upper resistance line of the channel for short positions and just below the lower support line for long positions, while profits are simply taken on the opposite side of the channel.