What
A channel is a trendline with a parallel on the other side. It is the trend’s lane. In an up-channel the trendline runs under the swing lows and the parallel runs over the swing highs. In a down-channel the trendline runs over the swing highs and the parallel runs under the swing lows. The two lines keep the same slope, so the lane keeps the same width.Read
In an up-channel the lower line is where buyers tend to show up, and the upper line is where longs tend to take profit. Price often swings from one side of the lane to the other and back. A down-channel reads the same way in reverse. The upper line is where sellers tend to show up, and the lower line is where shorts tend to take profit.Watch
Which line breaks matters. A break of the trend-side line, the lower line in an up-channel, is read as the trend-change signal: the lane that held the move has failed. A break of the other side, the upper line in an up-channel, is read as acceleration: the move is going faster than its own lane. For example, an up-channel has held for several swings. Price then pushes through the upper line and closes above it. One common reading is that buyers are stronger than the trend so far, not that the trend is ending. If instead price drops through the lower line and closes below it, the same traders start asking whether the trend is over.Caveat
The parallel is a guess until price has touched it. The trendline is drawn through real turns in price. The parallel is drawn by copying that slope to the other side, and until price reaches it and turns, there is no evidence that the market sees it. A channel describes the lane price has used so far. It doesn’t promise that price will stay in it, or leave it in a particular direction.Related
- Support and resistance: a price area where the market has turned more than once.
- Trendline: a line through swing lows or swing highs, extended to the right.
- Box: sideways price between a level above and a level below.