Price Trend Channels

Trend Channels can be very helpful in determining your entry or exit price for a stock trade. While regular trendlines show you the direction that the stock is moving, trend channels can show you where the stock is trading right now in comparison to the overall trend.

The idea here is the same as it is in drawing support and resistance: don't worry about touching extremes. Rather, concentrate on finding the 'best fitting' trendline. The lower line is what many would consider the "normal" trend line of the stock and is drawn by connecting low points of the stock. The upper line is drawn by connecting the high points of the stock during the recent move. The result is a "channel" that the stock has been trading in, sloped upwards. The drawing of these roughly parallel lines captures most of the price action in the channel.

Practical Example

The chart above is of Woodside Petroleum (WPL) from August 2006 to mid-February 2007. The downward trand channel is clearly indicated above. The yellow areas are the support levels while the aqua areas are the resistance levels.

How To Trade this Pattern.

Realistically, you would not trade this pattern until the support/resistance lines have thave at least been tested three times. It is better to see that the share price is actually confirming the pattern. In the above example, WPL hit the support and resistance lines three times each, thereby confirming the trend channel.

Currently, the share price is heading up to a resistance point. You could either wait for the price to break through the line and go long, or, see if the line remains intact and then go short.

It should be noted that, in the event of a breakout from resistance (or support), increased volume or other indictaors are needed to confirm such a move.

If you understand the basic idea of support and resistance then trendlines and channels are a trader's friend as they simply represent a way to illustrate support and resistance on trending securities.