What Is a Horizontal Channel?

Horizontal channels are trend lines that connect variable pivot highs and lows to show the price contained between the upper line of resistance and the lower line of support. A horizontal channel is also known as a price range or sideways trend.

How a Horizontal Channel Works

A horizontal channel or sideways trend has the appearance of a rectangle pattern. It consists of at least four contact points. This is because it needs at least two lows to connect, as well as two highs. Buying and selling pressure is equal, and the prevailing direction of price action is sideways. Horizontal channels form in periods of price consolidation.

Price is framed out in a trading range by the pivot highs (resistance) and pivot lows (support). Trend lines are drawn on pivots to give a visual picture of price action. A new high in the price above the horizontal channel is a technical buy signal. A new low in price below the horizontal channel (or rectangle pattern) is a technical sell signal.

There are three types of channels: horizontal, ascending, and descending channels. Channels that are angled up are called ascending channels. Channels that are angled down are called descending channels. Ascending and descending channels are also called trend channels because the price moves more dominantly in one direction.

The horizontal channel is a familiar chart pattern found in every time frame. Buying and selling forces are similar in a horizontal channel until a breakout or breakdown occurs. This type of channel combines several forms of technical analysis to provide traders with precise points for entering and exiting trades, as well as controlling risk.

To identify horizontal channels:

1. Manually look through charts to locate channel patterns.
2. Utilize stock screeners, such as Finviz.com, or a service that automatically recognizes channel patterns.
3. Subscribe to a service that provides a daily list of chart patterns.

Trading a Horizontal Channel

Horizontal 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 or take a short position.
• When the price is in the middle of the channel, do nothing if you have no trades open or hold onto your current trades.
• When the price hits the bottom of the channel, cover your existing short position or take a long position.

Horizontal Channel Example

Elevate Credit, Inc. (ELVT) shares traded within a horizontal channel since gapping lower on Oct. 30, 2018. Over this period, traders had the opportunity to short-sell the stock at the channel’s upper resistance line three times (red arrows).

Conversely, traders had the chance to buy the stock at the channel’s lower support line on three occasions (green arrows). Stop-loss orders would sit just above the channel’s upper resistance line for short positions and just beneath the lower support line for long positions, while profits would be taken at the opposite side of the channel.

The Bottom Line

Horizontal channels, used in technical analysis, provide traders with specific points of when to buy and sell. They are clear to use and provide a systematic approach to trading, typically occurring in times of price consolidation.