Trend channel

Two parallel boundaries fitted to a directional move. The first is an ordinary trend line drawn along the lows of an advance or the highs of a decline. The second is drawn parallel to it and placed against the extremes on the other side, so the two together enclose the move. The line the move rests on is conventionally called the channel's base and the opposite one its return line, and the width between them describes how far the market has been travelling around its own direction.

Two construction methods are in use and they give different channels. The strict method fixes the slope from the base line and copies it, so the channel is parallel by construction and the return line is placed at whichever extreme it reaches. The fitted method draws each boundary through its own points and accepts that they are not exactly parallel. Some practitioners also fit a channel statistically, by regression through the closing prices with boundaries at a stated number of standard deviations, which removes the drawing judgement and replaces it with a choice of window.

The trip is the same one that afflicts every fitted line, and it is worth stating plainly: a channel is drawn against the data that already exist, so it always describes the past well. Its boundaries are not levels the market has agreed to, and price leaves a channel routinely, sometimes accelerating away from it and sometimes returning immediately. Practitioners disagree about what a departure signals, one convention reading it as the move strengthening and another as it exhausting, and both conventions are documented on the same charts.