swing trading

Range | Channel Pattern - How It Works and How Traders Can Use It

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When it comes to the stock market, sometimes you might hear the term "range" or "channel pattern" mentioned. They mean the same thing and refer to a stock chart pattern that is popular among active stock traders.

This article will explain what a channel chart pattern is and how traders might be able to benefit from using it.

 

What Exactly Is a Range or Channel Pattern?

A range is the same thing as a channel pattern. Those two terms mean the same thing.

A range is a stock chart pattern characterized by two trend lines. One is a horizontal line along the top made up of price peaks, which serves as a resistance level. The other is a horizontal line of support at the bottom that connects the price troughs.

 

 

That image is a graphical icon that gives an idea visually of what a channel chart pattern looks like. You can see how the two trendlines run parallel to each other.

 

What Does a Channel Pattern Look Like On A Stock Chart?

The image below is an example of a channel pattern as shown on one of our stock charts.

 

 

There are golden lines on our charts that automatically outline chart patterns when they're detected.

You can see the flat top where the resistance level is and the flat bottom support level. The formation of those trend lines looks like a channel or a range.

 

How Do Traders Use a Channel Pattern?

The appearance of a range or channel pattern indicates that the price has been bouncing back and forth between the support and resistance trendlines.

There are multiple ways that traders could potentially try to take advantage of a channel pattern.

If the price of the stock surges outside the range in either direction, that would constitute a breakout, and a trader might anticipate that the direction of the breakout could continue and invest accordingly.

If the price of the stock is still within the range, a trader could make trades based off support and resistance by anticipating that the price might continue bouncing back and forth between the boundaries of the channel.

 

Is a Range Bullish or Bearish?

Standard symmetrical channel patterns are generally considered neither bullish nor bearish. The price is bouncing back and forth between support and resistance, and until the price breaks out of that range, there is no telling sign of which way the price might be headed.

Once the price breaks out of the range, that indicates whether it's bullish or bearish.

If the price breaks through the upper resistance line of the channel, that could be seen as a breakout and therefore is bullish. This means that the stock's price might continue to go up afterward. A trader could capitalize by going long (meaning that they would be buying instead of shorting).

If the price breaks through the lower support line of the channel, that could be seen as a breakdown and therefore is bearish. This means that the stock's price might continue to go down afterward. A trader could capitalize by going short.

 

How Do You Find Stocks That Have Channel Patterns?

You can find them by using our Channel Pattern scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks that are in a range.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock charts manually to find stocks with a channel pattern.

 

Video About Channel Patterns

Here's a video that explains channel patterns and gives examples:

 

Example of a Channel Pattern Trading Strategy

For this example of a channel pattern trading strategy, we're going to use a daily chart, where each price bar represents one day of price activity. That means it would be a swing trading strategy where the trade is designed to last more than one day but not for the long haul.

 

Entry for the Channel Pattern Trading Strategy

The entry for this Channel Pattern trading strategy will be as follows:

The entry criterion for our Channel Pattern trading strategy is very simple. You can see in the stock chart below for Avista that the entry price would be right above $40, where that upper golden line is.

 

 

Exit for the Channel Pattern Trading Strategy

There are a lot of possibilities here for the exit.

One benefit of using a stock chart pattern as a basis for making trades is that the pattern itself can help you determine exits in some cases.

For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.

Not everyone uses all three, and that's totally fine. Ultimately, you can set these values however you want. But for the purposes of this strategy example, we will define all three:

 

1. Profit Target

We will set the profit target at 2 ATRs away from the entry price.

ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.

Our profit target criterion indicates that we will take the ATR value of the stock, multiply it by two, and add it to the price we paid when we bought the stock. That will be our profit target and we can set up a sell limit order at that price.

2. Stop Loss

We will set the stop loss at 0.5 ATRs below the support line (the bottom trendline of the range). This means we take the ATR value of the stock, multiply it by 0.5, and subtract it from the price of the lower trendline from that day.

That will be our stop loss and we can set up a stop order at that price.

3. Time Limit

We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven calendar days after entry.

 

How Well Do Channel Patterns Actually Work?

The idea of a channel pattern trading strategy sounds nice to many people because it offers a clear, easy-to-understand way to find and manage a trade setup.

But does it actually work? Can traders indeed generate profits by trading channel pattern chart patterns?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that trades based on a channel pattern are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary channel pattern trading strategy we created has performed historically according to backtests:

 

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Anyone who signs up for our swing trading scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Channel Patterns

You can contact us any time if you would like to ask any questions about channel pattern, ranges, or anything else related to the stock market.