Channels in Technical Analysis

If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel. The channel is a difference between support and resistance. It estimates the potential path of the stock price in the future. Stock trends move in either of three directions. The rising trend is characterized by rising prices, while in a downtrend prices fall. When stock prices rise and fall between the same support and resistance price the stock is said to be trending "sideways". The visual representation of the channel will follow the direction of the trend being evaluated. Traders that channel stocks are ones that purchase stocks at support and then sell when they reach resistance.

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.

To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you created the trend line.

When prices hit the bottom trend line this may be used as a buying area. When prices hit the upper trend line this may be used as a selling area.

Sideways Channel

In this channel the stock is trading sideways because its stock price stays between the same two price points over time

Ascending and Descending Channels

An ascending channel indicates support and resistance for an uptrend. In this channel the price point for support and resistance increase with time. In a descending channel support and resistance prices decrease over time and indicate a downtrend. The analyst is using the channel to estimate support and resistance in order to make better trades.
Sources and additional reading:

http://www.tradinginnovations.com/technical-analysis/channels.asp
http://www.babypips.com/school/channels.html

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