Trend channels

A trend channel is two roughly parallel lines drawn along the edges of a price move. In a rising channel, the lines slope up; in a falling channel, they slope down; in a sideways channel, they are horizontal. Price moves between the lines, touching one edge and then the other. The channel is a way of describing the trend and the range of the swings.

How to draw a channel

To draw a channel, first find the swing points. In a rising channel, connect the lows with a line, then draw a parallel line through the highs. In a falling channel, connect the highs, then draw a parallel line through the lows. In a sideways channel, draw a line through the highs and a line through the lows.

The lines should be roughly parallel, but they do not have to be perfect. The channel is a zone, not a precise shape. The lines are drawn to contain most of the price action, not every single tick. A channel that needs constant adjustment is not a channel; it is a line drawn to fit a wish.

The site's rule does the drawing, so nobody has to judge. Rule CN-1 (rising channel): two pivot lows, found with a 2 ATR zigzag, 15 to 80 sessions apart, the later one higher, make a rising line of at least 0.05 ATR a session; the parallel line through the highest high between them is 3 to 12 ATR above it; at least two pivot highs lie within 0.5 ATR of that upper line; no low is more than 0.5 ATR below the lower line and no close more than 0.5 ATR above the upper. Rule CN-2 is the falling mirror. A channel counts as formed only when a session closes outside the two lines within 30 sessions after the second pivot.

What traders do at the edges

Traders often buy near the lower edge of a rising channel and sell near the upper edge. In a falling channel, they may sell near the upper edge and buy near the lower edge. In a sideways channel, they may buy at the lower edge and sell at the upper edge. These are not rules, but they are common practices.

The edges are not guaranteed to hold. Price can break through an edge and continue in the same direction, or it can reverse. The channel is a description of what has happened so far, not a promise of what will happen next.

What a break out of a channel is read as

A break out of a channel is read as a sign that the trend may be changing. If price breaks above the upper edge of a falling channel, some traders read that as a sign that the decline is over and an advance may begin. If price breaks below the lower edge of a rising channel, some traders read that as a sign that the advance is over and a decline may begin.

But a break out is not a guarantee. Price can break out and then return inside the channel, a move called a false break. The break out is a description of what has happened at one moment, not a prediction of what will happen next.

Why a channel is easiest to draw in hindsight

A channel is easiest to draw in hindsight because the swing points are clear only after the fact. While price is moving, it is not obvious which lows to connect or which highs to use. A channel that looks obvious on a historical chart may have been invisible while it was forming.

This is why a channel is a description of what has already happened. It is not a tool for predicting the next swing. The channel can be drawn after the fact, and it can be used to talk about the trend, but it cannot tell you where price will go next.

What the charts under the heading show

The page carries two charts. The rising channel is on Brent crude: the lower line runs from 71.58 dollars a barrel on 28 June 2023 to 86.50 on 1 November, the upper line from 86.78 to 101.70, 15.20 dollars apart, rising about 0.17 dollars a session. Lows were on 28 June and 6 October, highs near the upper line on 19 and 28 September. It counted as formed on 1 November 2023, when a session closed at 84.63, below the lower line.

The falling channel is on gold futures: the upper line runs from 2,085.40 dollars an ounce on 4 May 2023 to 1,975.09 on 1 August, the lower line from 1,962.25 to 1,851.95, 123 dollars apart, falling about 1.84 dollars a session. It counted as formed on 1 August 2023, when a session closed at 1,978.80, above the upper line. Both are the cleanest by the rule's own measure.

How many were found

Rule CN-1 found 12 rising channels in ten years, 7 on Brent and 5 on gold; rule CN-2 found 7 falling channels, 3 on Brent and 4 on gold. They are not all independent: channels last up to 80 sessions and the search runs over every session, so neighbouring channels can share most of their candles. The count of separate stretches is what the site reports.

In both drawn examples the figure was completed by a break out of the channel, not by a bounce inside it. The rule requires that, because until a close leaves the lines the channel has not yet ended, and the channel is a thing that ends.

The middle of a channel is where the line gets quiet

Some chartists draw a third line down the centre of the channel, halfway between the upper and lower edges. They use it as a rough guide for when a move has travelled half its expected distance. But a centre line is not part of the original pattern. It is a personal addition, and different traders place it differently depending on which touches they used for the channel.

A channel can slope up, down, or sideways, and the reading changes with the slope

The slope also changes how traders treat the edges. In a rising channel, the lower edge is where buyers are expected to step in, and the upper edge is where some take profit. In a falling channel, the upper edge is where sellers return, and the lower edge is where short sellers may cover. The pattern itself does not say which edge is stronger; the slope does.

A common mistake is to draw a channel on a market that is barely moving and then call it a trend. A flat channel is not a trend; it is a sideways range with neat borders. The edges may still work as support and resistance, but the expected follow-through after a break is weaker than after a break from a sloped channel.

The first touch after a break often comes back to the old line

When price breaks out of a trend channel, it rarely moves in a straight line away from it. The first pullback often brings price back to the broken line. That line, which was once an edge of the channel, now acts as a different kind of level. On a rising channel, the broken upper line may become support. On a falling channel, the broken lower line may become resistance.

This return to the line is one of the most watched moments after a break. Some traders wait for it before entering in the direction of the break. Others use it to add to a position they already hold. But the return does not always happen neatly. Price can come back to the line, pause for a few bars, and then continue in the direction of the break.