Price Channel

A price channel is constructed by drawing two parallel lines below and above price movements. The two lines of a channel represent support (lower line) and resistance (upper line) and they are drawn through the support and resistance points. In technical analysis price Channels are used to display trend direction (up, down or sideways) and to generate signals inside of the price channel (buy when the price rebounds from the support line and sell when the price bounces off the resistance line) and they are used to identify moments when either the support or resistance line of a Price Channel is broken as that may suggest the possibility of changes in the general trend.

On the NASDAQ 100 chart below (see Chart #1) you can see the basic application of the Price Channel during the uptrend. The simple trading system of using a Price Channel within the general up-trend would tell when to add to one’s position (to buy) whenever the price rebounds from the support line (lower line of the Price Channel) and when to close a long position when the price drops below the support line. Controversially, the same simple trading system would say to sell whenever the price bounces off the resistance line during a general downtrend and close a short position when the price rises above the resistance line (see NASDAQ 100 Chart #2).

Chart 1: NASDAQ 100 chart with Price Channel during an up-trend

Chart 2: NASDAQ 100 chart with Price Channel during a downtrend.

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