Price channel
Family VI · Charts & indicators
Not to be confused with price action, price gap.
Price channel is a chart construct consisting of two parallel lines that bound recent price movement: an upper line drawn through successive highs and a lower line drawn through successive lows. The lines are parallel because they share the same slope, which represents the direction of the trend. Price channels are used to visualise trend direction and to identify potential support and resistance levels.
Construction and interpretation
A price channel requires at least two points on each side. The upper line is drawn through two or more swing highs, and the lower line is drawn through two or more swing lows. The two lines must be parallel; if they are not, the pattern is a triangle or wedge rather than a channel.
In an upward-sloping channel, the lower line acts as potential support and the upper line as potential resistance. In a downward-sloping channel, the roles reverse. Price is not required to touch the lines exactly; the lines serve as reference levels. A close outside the channel can indicate a trend change or acceleration, but false breaks are common.
Channels are also used to set price targets. When price breaks above an upward-sloping channel, some traders project the channel's height from the breakout point to estimate a minimum move. The same logic applies to downward breaks.
Worked example
Suppose a stock has swing lows at 50 and 54, and swing highs at 60 and 64. The lower line connects 50 and 54, giving a slope of 4 points per period. The upper line connects 60 and 64, giving the same slope. The vertical distance between the lines is 10 points.
Variations and caveats
Channels can be drawn on any timeframe and on any liquid market. Some analysts use logarithmic scales for long-term charts, which changes the slope and parallelism of the lines. Others use regression channels, where the lines are placed a fixed number of standard deviations from a linear regression line; these are not drawn through swing points.
Because channel lines are subjective, different analysts may draw different channels on the same price series. The pattern is therefore best used alongside other evidence, such as volume or momentum, rather than as a standalone signal.
Often confused with
- price action
- Price action is the study of raw price movement and patterns without indicators, whereas a price channel is a specific geometric overlay drawn on price; the visible sign is the presence of two parallel lines on the chart.
- price gap
- A price gap is a discontinuity where no trading occurs between two price levels, while a price channel is a continuous corridor of parallel lines; the visible sign is a blank space on the chart versus two sloping lines.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci