What is a Channel?

• Channel is defined as an area between the two parallel trend lines. It often describes the trading range of a particular stock.
• The upper trend line connects the swing highsin the price, while as the lower trend line connects the swing lows.
• Channel is often overlooked to study by the trades and investors but, it’s very powerful form of trading/investing for optimizing your profits.
• Channel trading combines several forms of technical trading.

If the price breaks out of the channel to the upside, that indicates a further rally in the price. If the price breaks below the bottom of the channel, it indicates that more selling could be on the way altering trader for next action. The chart above shows a channel and breakout in the stock of Titan Company Ltd.

The channel trading technique often works best on stocks with a medium amount of volatility. Very little volatility and the channel won’t be very broad, which means small profits. Bigger channels, typically associated with more volatility, mean larger potential profits for the traders.

There are three types of channels.

1. Channels that are angled up are called ascending channels (UP Channel).
2. Channels that are angled down are called descending channels (Down Channel).
3. Channels in which the trend lines are horizontal are called horizontal channels (Sideways Channel).

Ascending and descending channels are also called trend channels because the price is moving more dominantly in one direction.

Buying or Shorting the Channel :

Channels provide a clear and systematic way to trade by providing buy and sell points. Here are the trading rules for entering long or short positions.

• When the price hits 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 trades, or hold onto your current trades.

When the price hits the bottom of the channel, cover your existing short position and/or take a long position.

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