What are Trend Channels in Stock?

Now that you know all about trend lines, let’s take it one step further!  Rather than drawing one trend line, how would you feel about drawing two? 

Two trend lines at the same angle of the uptrend or downtrend. Or in other words, how would you feel about drawing a trend channel?

What are Trend Channels?

Trend channels, also sometimes called price channels or trading channels, are a popular tool in technical analysis used by investors to determine good places to buy or sell.

Trend channels consist of at least two trend lines that connect the swing highs and the swing lows of a trending or a sideways moving market. 

It’s important to note that trend channels don’t have to be perfectly parallel lines, but more on that later!

First, let’s take a look at what a trend channel looks like on a chart!

Trend channels

Different Types of Trend Channels

Same to trend lines, there are 3 main types of trend channels. 

  • Ascending channel or Rising channel (higher highs and higher lows)
  • Descending channel or Falling channel  (lower highs and lower lows)
  • Sideways or horizontal channel (ranging)

Drawing Trend Channels on your Chart

Trend channels with a downwards slope are considered bearish. The trend line is plotted above, while the trend channel line is below the price action.

So, to draw a bearish channel, simply draw a straight line parallel to the downtrend line and then move that line to a position where it touches the most recent low.

Trend channels with an upwards slope are considered bullish. The trend line is plotted below the price action, while the trend channel line is positioned above the highs of the price movement.

So, to draw a bullish channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the most recent peak.

Finding Buying and Selling Areas Using Trend Channels

When prices hit the LOWER 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.

Pretty simple, right?

Trend channels
Trend line img

Don’t Look for Textbook Channels!

Trend channels don’t have to be perfectly parallel trend lines.

Read that again. 

Throughout my career as a trading mentor, I found that many traders make the mistake of spending too much time looking for textbook price patterns. They miss important information about price action and close their eyes for other important clues. Studying and waiting for textbook examples won’t help you make trading decisions, in fact it will make it even more difficult.

Wrapping Up

And that’s it! 

Now that you know all about trend lines and trend channels, do you think you will include trend trading to your strategy?

Our advice? No matter what type of trader you are, what trading style you prefer, trend channels are always a good idea!