Reviewed by Aug 27, 2020| Updated on
The price channel occurs when the price of a security which is bounded by two parallel lines. The channel may be called horizontal, rising, or descending, depending on the direction of the pattern. Traders, who practice the art of technical analysis, often use price channels to gauge the momentum and trajectory of the market action of a security and to define trade channels.
A market channel emerges when the price of a commodity is buffeted by the supply and demand forces and may be trending upward, downward, or sideways. These forces influence a security 's price and may cause it to build an extended price channel. One force 's superiority determines the direction of the trend for the price channel. Price channels can occur over various timescales. All types of securities and instruments, including futures, mutual funds, stocks,exchange-traded funds (ETFs), and more, can create them.
Price Channel Analysis
There are theoretically a variety of ways to benefit from better defining price channels. Investors have the greatest opportunity to gain, using both long positions and short positions, when security follows a delineated price channel path.
The optimization of profits in an uptrend is based on establishing security buy positions at advantageous levels. Once a price channel is identified, the investor will likely be able to expect security to reverse course and rise when its price reaches the lower bound of the channel. That allows them to start a buying position at a discount price.
A bullish investor would want to keep their holdings at the upward bound in anticipation of a breakout in an upward trending market channel, which would lead to a price surge. If that security appears likely to remain within its price channel, the profitability can be maximized by selling out or taking a short position at the upbound.