What Is A Horizontal Channel Chart Pattern?
In technical analysis, a horizontal channel, also known as a "sideways channel" or "price range", is a continuation chart pattern that forms on the price charts of markets when the price trades within a horizontal swing high and a horizontal swing low level. It indicates that the price is moving within a trading range and trading sideways with no real trend.
When the price of a market moves within a horizontal channel, it is known as rangebound price action.
Horizontal Channel Pattern Components
In order to identify a horizontal channel, there are two components that need to be visible on the price charts.
The two components of a horizontal channel pattern are:
- Horizontal support level: This is a horizontal level of support that connects the swings lows in the prices together.
- Horizontal resistance level: This is a horizontal level of resistance that connects the swing highs in the prices together.
Drawing a horizontal channel involves combining these two levels of the support and resistance level together.
Horizontal Channel Chart Pattern Examples
Below are visual examples of the horizontal channel chart pattern.
Example Of A Horizontal Channel Pattern In The Stock Market
On the daily chart of Square stock, a horizontal channel pattern forms. The price moves up and down within the price range of the horizontal channel.
Traders will typically look to make short trades when the prices moves nearer the resistance level and they will look to buy the stock when the price moves nearer the support level.
Example Of A Horizontal Channel In The Forex Market
On the daily chart of GBP/USD, a horizontal channel pattern forms. The price of the currency pair moves within this range for many months, as evident from the price chart.
When a horizontal pattern forms, traders will either choose to stay out of the market, short near the resistance level or buy near the support level with tight stop-losses.
Example Of A Horizontal Channel On A Shorter Timeframe Price Chart
On the 5 minute price chart of Shopify stock, a horizontal channel pattern formed.
Even on the lower timeframes, horizontal channels can form. Day traders and scalpers can choose to trade when it reaches the horizontal resistance level or the horizontal support level.
Example Of A Horizontal Channel On A Longer Timeframe Price Chart
In the weekly price chart Deere & Company stock, a horizontal channel forms. The price of Deere stock moves within this price range for many months before it breaks out.
When the price trades within this range, there is no clear trend direction.
This is an example of a horizontal channel pattern on a longer term timeframe chart.
How To Find Horizontal Channel Patterns
The methods for finding horizontal price channels in the markets are:
- Manually checking the price charts: A trader can manually check different price charts to find horizontal channels.
- Using a technical analysis scanner tool: A trader can use a technical analysis scanner tool to scan for horizontal patterns automatically.
Horizontal Channel Pattern Benefits
The benefits of the horizontal price channel patterns are:
- It helps prevent traders from trading choppy price action: When the market forms a horizontal channel, it can signal for a trader to exit their traders and sit on the sidelines.
- It can signal for a trader to avoid trading: When the price action is choppy and in a sideways range, a horizontal channel can help indicate to stay out of the market as market conditions tend to be more difficult for traders during choppy market environments.
- It can offer low-risk trading setups: When the market moves into the support or resistance areas of the horizontal channel, it can offer traders a low-risk area to make a trade.
- It is easy to learn: A trader can easily learn how to draw and use a horizontal channel as there are only two components needed.
Horizontal Channel Pattern Limitations
The limitations of horizontal price channel patterns are:
- Choppy markets are tough to trade: Traders find it hard to trade when the price is moving in a range between the two horizontal levels.
- It has a low win rate when trading the ranges: Traders attempting to short or buy the resistance and support levels can be stopped out many times as the price action is volatile.
Horizontal Channel Pattern Formation Duration
The length of time it takes for a horizontal channel to form will depend on the timeframe of the price chart used.
Examples of how long a descending channel takes to form based on different timeframes include:
- It takes approximately 3 hours and above for a horizontal channel to form on a 3-minute price chart.
- It takes approximately 90 hours and above for a horizontal channel to form on a 30-minute price chart.
- It takes approximately 30 days or more for a horizontal channel to form on a daily price chart.
- It takes approximately 30 weeks and above for a horizontal channel to form on a weekly price chart.
Frequently Asked Questions About The Horizontal Channel Pattern
Below are frequently asked questions about the horizontal channel chart pattern.
Is A Horizontal Channel Pattern A Reversal Or Continuation Pattern?
A horizontal channel is a continuation pattern that indicates that the price of a market will continue to move within a horizontal price range between a high and low.
What Does A Horizontal Channel Pattern Tell You?
A horizontal channel pattern tells a trader that the price of a market is moving in a choppy, volatile price range between a horizontal level of support and a horizontal level of resistance.
What Price Chart Timeframes Can A Horizontal Channel Pattern Form On?
A horizontal channel can form on any timeframe price chart from a shorter tick chart to a higher timeframe monthly price chart.
What Is The Difference Between A Horizontal Channel And An Ascending Channel Pattern?
The differences between a horizontal channel and an ascending channel pattern are:
- Its shape: A horizontal channel is shaped with two horizontal lines whereas an ascending channel is shaped with two upward sloping lines.
- What it signals: A horizontal channel signals that the price will move within a choppy sideways price range whereas an ascending channel will signal that the price will move in a bullish direction within a bullish price range.