In this unit, we will discuss 'Channels', which is a type of chart pattern based on trendlines.
What are Channels?
A Channel, or Channel lines, can be described as the addition of two parallel trend lines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows.
How to interpret this pattern?
A Channel can slope upward, downward or sideways. However, regardless of the direction, the interpretation still remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels. In this case, traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, Channels are mainly used to illustrate important areas of support and resistances.
Below is the example of Rising Channel formed in the daily chart of PNB Housing Finance Ltd.:
Price target and Stop-loss:
The stop loss can be set above the swing high before the price breakout from the channel. The price target can be set as the height of the channel.
Channels help the traders to buy and sell when the prices are moving between trendlines. This pattern also helps the traders to estimate stop-loss and target levels. The time taken by the channel to form helps in determining the strength of the channel.