What Is A Price Channel Chart Pattern?
In technical analysis, a price channel, also known as a "trading channel", is a continuation chart pattern that forms on the price chart of a financial market when the price moves within a specific price range or trading range with a clearly defined support level and a clearly defined resistance level.
A price channel can form in a bullish trend, a bearish trend or during sideways price movements.
Price Channel Pattern Components
In order to identify a price channel chart pattern, there will need to be two components displayed on the price chart.
The 2 components of a price channel chart pattern are:
- A resistance level: The resistance level connects the swing highs of the prices together. It can be a rising, declining or horizontal level.
- A support level: The support level connects the swing lows of the prices together. It can be a rising, declining or horizontal level.
Drawing a price channel chart pattern involves combining these components of the support and the resistance levels together.
Price Channel Pattern Types
There are three types of price channel chart patterns. The three types are:
- Bullish Channels: A bullish channel, also known as an "ascending channel", is a channel that forms on the price chart during a bullish trend in the market. It will have upward sloping parallel support and resistance lines.
- Bearish Channels: A bearish channel, also known as a "descending channel", is a channel that forms on the price chart during a bearish trend in the market. It will have downward sloping parallel support and resistance lines.
- Horizontal Channels: A horizontal channel forms when the price of a market is moving in a sideways manner. It will have parallel horizontal support and resistance lines.
Price Channel Chart Pattern Examples
Below are visual examples of the price channel chart pattern.
Example Of A Bullish Channel Pattern
In the price chart of the S&P500 index, a bullish channel pattern forms on the chart. The price of the market moves higher between two parallel rising levels of support and resistance.
The rising support level connects the higher swing lows in the prices together. The rising resistance level connects the higher swing highs in the prices together.
Example Of A Bearish Channel Pattern
In the price chart of Zoom stock, a bearish channel pattern forms on the chart. The price of the market moves lower between two parallel declining levels of support and resistance.
The declining support level connects the lower swing lows in the prices together. The declining resistance level connects the lower swing highs in the prices together.
Example Of A Horizontal Channel Pattern
In the price chart of EUR/USD, a horizontal channel pattern forms on the chart. The price of the market moves in a sideways manner between two clearly defined horizontal levels of support and resistance.
The horizontal support level connects the swing lows or troughs in the prices together.
The horizontal resistance level connects the swing highs or peaks in the prices together.
For the price action on the chart of EUR/USD, a trader can easily see a horizontal channel.
How To Find Channel Patterns
The methods for finding price channels in the markets are:
- Scrolling through price charts manually: A trader can manually scroll through the price charts and draw the channels on their own.
- Using a channel pattern scanner: A trader can use a channel pattern scanner to find channel patterns.
- Join technical analysis newsletter: Traders can find technical analysis and chart pattern newsletter where an expert will highlight potential patterns including channels.
Price Channel Pattern Benefits
The benefits of price channel patterns are:
- It can help provide logic to the price action: Understand that the price is trading within a price channel can help provide logic and understanding to the price action in the market.
- It can help a trader manage risk: A price channel pattern can help a trader find a low-risk entry point into a market.
- It helps catch price trends: Bullish and bearish channel patterns can help traders catch a price trend from a low-risk entry point.
- It's easy to learn: New traders can easily learn how to find and draw price channel patterns.
- It can assist with setting price targets in trades: A price channel pattern can help assist with finding price targets for trades as a price channel has areas of resistance and support.
Price Channel Pattern Limitations
The limitations of price channel patterns are:
- It can be hard to get exact entries: Buying the support level and shorting the resistance levels of the channel can be trough as the price can trade through them quite often before retracing back.
- They can fail: The channel pattern can fail and frustrate newer trades trying to capture price moves.
- They can form during challenging price action periods: A price channel pattern can form during choppy and volatile price action periods making them harder to trade.
Price Channel Pattern Formation Duration
The length of time a price channel takes to form will depend on the timeframe of the price chart.
Popular timeframes and the duration it takes for a price channel to form include:
- It takes approximately 90 minutes and above for a channel to be defined on a 1 - minute price chart.
- It takes approximately 60 hours and above for a channel to be defined on an hourly price chart.
- It takes approximately 60 days and above for a price channel to be defined on a daily price chart.
- It takes approximately 60 weeks and above for a price channel to form on a weekly price chart.
Frequently Asked Questions About The Price Channel Pattern
Below are frequently asked questions about the price channel chart pattern.
Does A Channel Pattern Signal Bullish Or Bearish Price Action?
A price channel pattern can signal a bullish or bearish trend continuation depending on the type of channel that forms.
A bullish channel is a bullish signal that the prices will continue to rise. A bearish channel is a bearish signal that the prices will continue to decline.
A horizontal channel is a neutral signal that the prices will remain flat and trade in a choppy sideways nature.
Is A Channel Pattern A Reversal Or Continuation Pattern?
A price channel is a continuation chart pattern that signals that the trend of the price will continue in the same direction until the price breaks out of the channel.
What Does A Channel Pattern Tell You?
A price channel chart pattern illustrates that the price action is in an orderly fashion between clearly defined support and resistance levels and that the trend direction will continue until the price breaks out or breaks down from the channel.
What Price Chart Timeframes Can A Channel Pattern Form On?
A price chart pattern can form on any timeframe of price chart from as low as a 1-minute price chart up to a weekly and monthly price chart.
Popular timeframes where channel patterns form include the 1- minute price chart, the 30-minute price chart, the hourly price chart and the daily price chart.
What Is The Difference Between A Channel And A Rectangle Pattern?
The differences between a price channel pattern and a rectangle pattern are:
- Duration to form: The duration of a price channel to form is much longer than a rectangle to form on any timeframe of price chart.
- The shape: A rectangle pattern is a horizontal pattern with horizontal support and resistance levels that form on price charts whereas a price channel can form with declining or rising support and resistance levels.