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Channel line is an extension of the trend lines. Sometimes on chart you can see that the prices are moving between two parallel lines: trend line and channel line.

Channel line
Channel line

Using of channels is typical for traders who do not hold positions too long (they are trying to make profit on price fluctuations). When the price of financial instrument is close to the trend line it is signal for buying and when it approaches the channel line, it is signal for selling. This way, you can even trade against the trend, although it is not recommended because of greater risk.

Breakthrough of channel line
Breakthrough of channel line

When breakthrough of channel line occurs, some technicians recommend that new channel line should be drawn connecting the previous point of channel line with a new point (points 4-6 on the picture). The trend line is also redrawn and it is formed by drawing parallel line to the new channel line.

The channel can be used for the identification of trend weakening. If the next peak or trough on the chart does not manage to reach the channel line that can be an early signal of trend weakening or even its reversal.

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