Price Channels and Rectangle Formations

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In Price Channels and Rectangle Formations, price moves in between two parallel lines. Breakout from these decides the further trend.

 

Price Channels are made up of two diagonal but parallel lines, so it is important to discuss them first. 

 

1. Trend line

 

It is a diagonal line connecting two or more points, marking them as a support or resistance levels for the price. It is an important technical tool used by traders to identify and confirm the market trend. 

 

It is of two types:-

 

1.1 Uptrend line

 

(Chart courtesy of StockCharts.com)

 

It acts as a support for price in an uptrend. It is a diagonal line connecting two or more price lows in which the following or second low has to be higher than the previous or first low. Usually, the third higher low is counted as to confirm the solid support for the uptrend.

 

1.2 Downtrend line

 

(Chart courtesy of StockCharts.com)

 

It acts as a resistance for price in a downtrend. It is a diagonal line connecting two or more price highs in which following or second high has to be lower than the previous or first high. Usually, the third lower high is counted as to confirm the solid resistance for the downtrend. 

 

2. Channel line

 

It is also known as the returning line because price usually moves to a certain distance before returning to the trend line. The distance price travels mark other points which can be joined to form another line called channel line. It is also drawn diagonal but parallel to the trend line. 

 

2.1 In an uptrend, it is marked by higher highs.

 

 

2.2 In a downtrend, it is marked by lower lows.

 

 

The third higher high or lower low can be counted as confirmation of solid resistance and support in uptrend and downtrend respectively.

 

• Now, what are Price Channels?

 

Price movement between these two diagonal but parallel lines forms a channel. 

 

There are basically two types of channels:-

 

1. Ascending Price Channel

 

(Chart courtesy of StockCharts.com)

 

In this Price Channel, price moves in upward sloping parallel lines with higher highs (channel line) and higher lows (trend line) making them a good resistance and support for uptrend respectively. The breakout above this channel confirms the continuation of uptrend and breakout below this channel signals trend reversal. 

 

2. Descending Price Channel

 

(Chart courtesy of StockCharts.com)

 

In this Price channel, price moves in downward sloping parallel lines with lower highs (trend line) and lower lows (channel line) making them as a good resistance and support for downtrend respectively. The breakout below this channel confirms the continuation of trend and breakout above this channel signals trend reversal. 

 

• Rectangle Formations

 

Rectangle Formations are also known as trading ranges or consolidation zones as price moves in between two horizontal and parallel lines only. The upper line is the resistance and the lower line is support for the price. Rectangle Formations represent a conflict between buyers and sellers in which both are powerful and neither of them let the price move in one direction. During this, demand and supply remain in the balance until the breakout occurs. The move created after this is considered as a significant move.

 

 

They can form after both uptrend and downtrend. Three almost equal highs and lows are required to form the upper resistance line and lower support line respectively. Breakout with heavy volume in either direction confirms the direction of a trend.