How to Trade Trend Channels and Ranges (Rising, Falling and Sideways Price Channels)

You need two trendlines to create a channel in price. Trendlines, channels, ranges, and price swings are all part of a field of study called technical analysis, which is based on the study of charts for making trading decisions.

The lower trendline connects at least two, and preferably three or more, low points in price. The upper trendline connects at least two, and preferably three or more highs points in price. These high and low points are called “swings” or price swings, and are marked by the arrows on the chart below.

When connecting swing highs with other swing highs, and lows with other swing lows, it can make it look like the price is bouncing off the trendlines. The trendline is just a visual representation of what is happening.

Buyers are stepping in (or sellers are backing off) near the lower trendline, so this is called the “support.” At the upper trendline, sellers are stepping in and buyers are backing off, so it is called resistance.

When trading trend lines, the idea is not to simply draw what you want to see or to confirm your own bias of what you think the price is doing. You should instead connect highs to highs and lows to lows with trend lines, and see what bigger picture emerges. Sometimes you will get channels, and other times you will get triangles, wedges, or broadening wedges – or even some other pattern.

The exact high and low points may not line up exactly with trendlines, and that is okay. Drawing the channel simply highlights how the price has been recently moving and how it may continue to move in the future. The price doesn’t always move in channels, but it often does.

The chart above shows a range, or sideways channel. This pattern occurs when up and down swings in price are very similar in size. The price can’t make progress, so it gets stuck moving sideways. There are also ascending and descending channels, which will be discussed in further detail.

An ascending channel means the swing highs and swing lows are rising. The price is making progress to the upside, as the moves up are bigger than the moves down. This is an uptrend.

An ascending channel can be drawn by drawing a line underneath the rising lows of the price. If the line moves slightly through a low point, instead of exactly under it, that is fine, too. The same is done along the highs. Draw a line that intersects the swings highs in price.

With a descending channel, the price is making progress lower. The moves down are bigger than the moves up. Draw the channel by placing a trendline along the swing highs in price. Similarly, a trendline can also be drawn along the swing lows, connecting them.

Once again, the trendline doesn’t need to be exact. It is there to show the general movement of the price. If it runs perfectly along the highs, for example, that is great; but if one of the highs is slightly above the line, that is fine, too.

The chart below shows an uptrend, followed by a downtrend and then a sideways range.

How do you know when the price has moved from an ascending channel to a descending channel? Well, you don’t know what will happen after the upward channel is “broken”, but you do know that the price is no longer inside the ascending channel if the price drops below the lower trendline.

That is a channel breakout, when the price moves outside the channel. At the far end of the above chart, we don’t know what will happen, but we do know the price is in a channel. If the price bounces off the bottom of the channel, the range is still in effect.

If the price plunges through the bottom of it, then that range is no longer in effect. So the next question becomes: how do you trade all these types of channels once you have identified them? Let’s look at some trading strategies next.

Here are the basic ways to trade trend channels:

• In an ascending trend channel, buy near the bottom of the trend channel and sell near the top.
• In a descending trend channel, short near the top of the channel and buy (exit) near the bottom.
• In a sideways range, buy near the bottom and sell near the top, or short near the top and buy (exit) near the bottom.

When a trend is present, you are trading in the same direction as the trend. When there is no trend — a sideways range — you can trade in either direction, but you want to be buying near support and selling or shorting near resistance.

In all cases, you should ideally wait for the price to bounce off the trendline and then start heading in your anticipated direction. For example, in a rising channel, wait for the price to reach the bottom of the channel and then start moving up again. Enter a long position with a stop loss below the low that just occurred. Your target is near the top of the channel.

For a descending channel, wait for the price to reach the top of the channel, and then short once the price starts dropping away from the trendline. A stop loss goes just above the high that just occurred and the target goes near the bottom of the channel.

Trend channels don’t typically last very long. The price may make several swings forming a nice trend channel, and then the price will break out of it. Trend channel breakouts are also tradable.

For example, if the price is in an ascending channel, if the price drops out of the channel that is a breakout. You could enter a trade right then (shown as “Entry 1” on the chart below) but I much prefer “Entry 2”.

You see the breakout and you wait for a pullback. Ideally, that pullback stays outside the old channel. Once the price starts dropping again, then take a short trade. This way you can put a stop loss just above the swing high that just formed, or just above “Entry 2” in this case.

With a channel breakout your profit target or exit points isn’t as clearly defined as it is when you are trading within the channel.

A good rule of thumb is to use the width of the prior channel, and assume the price will drop that much out of the channel. In the case above, the channel is about $4 wide.

If measured from swing low to swing high, the up moves are about $4 each. When the channel breaks near $46, you can therefore assume the price will likely fall to $42, or potentially lower – but $42 would be a solid place for a profit target.

The same concept applies to descending trend channels or ranges. Wait for the breakout, wait for the price to pullback and ideally stay outside the old channel, and then enter when the price starts moving in the breakout direction again. The size of the old range/channel provides an idea of how the price may run following the breakout.

If you are unsure what position size to take on a trade, use a position sizing calculator to figure it out.

In charting platforms like TradingView and others, you will often be able to find a “parallel channel” drawing tool. When you draw one line, this tool will automatically draw another line parallel to it. This creates a channel which you can then apply to the price as you see fit.

Another option is the Regression tool, which forms a channel of best fit through any data selected. With this tool, you don’t draw the channel yourself; you simply highlight the amount of time or price area you want the tool to draw a channel of best fit on.

The software will do some calculations and essentially show where the price spent most of its time during that period. This can often act as a trend channel.

The chart above shows a regression channel applied to price. It does a pretty good job of highlighting a channel. It may not be exactly how you or I would draw it by hand, but it does show the general tendency of the price during that period of time.

Do trendlines work in trading?

Trendlines are a tool that highlight the direction price is moving, or support and resistance levels. No tool guarantees success, rather it is how the tool is used that matters.

Trendlines can be used to find entry or exit points, but stop losses should always be used to limit risk on any trade. Also, proper position sizing assures a losing trade doesn’t significantly damage the trading account.

How profitable is trend trading?

There are many successful traders who are trend traders, including Nicholas Darvas, Jesse Livermore, Mark Minervini, and Ed Seykota. Trend trading is one of the most common forms of trading.

Long-term investors are attempting to capitalize on the long-term uptrend in the stock indices. Even day traders can capitalize on intraday trends. Some of these traders have amassed millions, if not billions, of dollars from trend trading.

What are the different types of trend channels?

There are rising and falling channels, also called trend channels. There is also a sideways channel, often called a range or rectangle. You could also categorize the strength of the channel as strong or weak. A sharply rising channel would be strong, while one barely angled up would be weak, for example.

How do you trade price in channels?

The general idea of trading channels is to buy near the lows of an ascending channel and sell near the top. Ideally, wait for the price to start moving up off the bottom of the channel before buying. Enter short trades near the top of a descending channel as the price starts falling, and exit the position near the bottom of the channel.

Is range trading profitable?

Range trading can be profitable as assets spend a considerable amount of time in a range-bound state. The key is to limit losses when the range ends and a trend begins.

Once a trend begins the price can run a long way, resulting in large losses if the price is moving against the trade. By buying near the lows of ranges, and exiting near the top (and possibly shorting near the top) it is possible to profit from ranges while the range persists.

Final Thoughts on Trend Channels and Ranges

Price spends a lot of time in ascending and descending channels and ranges, so it is worth learning how to draw and trade in those situations. The general concept of channel trading is to buy near the lows and sell near the highs of the channel. Breakouts can also be traded. Remember to utilize a stop loss and profit target on each trade to manage risk and lock in profits.

If you need some help drawing channels, the parallel channel tool can help in most charting platforms, and the regression tool is excellent for highlighting the overall tendency in price over a given period of time. Channels are a type of chart pattern, but there are plenty of others you can trade on as well. For further reading, learn other common trading patterns and how to trade them.