| Updated: September 12, 2025Further talk on spike plus channel trends
This lesson will cover the following
- The different appearance of channels
- Trading channels against the trend
- Market behaviour during the channel phase
In our previous article, we already said that a trend reversal may occur following a spike in the opposite direction. We should note that there is also a chance the market may reverse direction if a trading range develops after the spike. If a spike to the upside is followed by a trading range, almost 30% of the time the breakout will occur from the lower area of the range rather than from the top. The breakout may appear as a huge bearish move (spike), but in many cases it is a moderately sized bearish trend bar, after which a bear channel follows.
The channel phase
When a channel forms, the most appropriate decision is to take entries only in the direction of the trend. At times, huge swings may occur within the channel; these may provide experienced traders with the opportunity to scalp against the trend as the channel continues to develop. However, this is a risky move because channels may extend further than one expects, and they always seem to attempt to reverse. Many bars with large wicks, trend bars in the opposite direction, and bars with considerable overlap may appear, but they are all part of the existing trend, so a premature entry against the trend may prove very expensive for a trader.
Channels may appear in different ways
In some cases, trading days may have trends that begin with a sharp move (strong momentum), followed by a channel with a shallower slope that develops during the remainder of the day. Sometimes the channel may accelerate and become parabolic rather than linear. In other cases, the channel can have lower momentum and appear flatter. Either way, the beginning of the channel is tested later in the day, and the test can be followed by a trading range. What is of utmost importance for a beginner is that if the channel appears to be very tight, it should be traded only in the direction of the trend. This is because pullbacks may not travel a sufficient distance for a profitable counter trend trade. In rare cases, the channel is broad enough for decent trades to be taken in both directions.
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Trading channels against the trend
If a trader is considering entering the market in a counter trend direction, such entries should be made only after a breakout from the channel actually occurs against the trend. In this case, the move against the trend may test the very beginning of the channel and form a trading range. Although a channel can be considered a sloping trading range, as we already said, it can also be the first leg of a larger trading range. The reversal may occur near the beginning of the channel.
Example
Let us imagine the following scenario. A sudden move to the upside is followed by a pullback and a bull channel. This bull channel represents the first leg of a trading range that is about to form. Prices may retrace to the lower area of the channel and attempt to create a double-bottom bull flag (the second leg). This may then be followed by a move up, which is the third leg of the developing trading range. After this move up, a trader should look for other setups, as the spike plus channel pattern no longer has predictive value.
Market behaviour during the channel phase
Another important point to note is that price behaviour during the channel phase is the same as in any other channel. Almost every spike plus channel bull setup has a breakout through the lower area of the channel, with the test occurring close to the bottom of the channel. A common reversal setup is a three-swing price pattern within a channel that tends to have a wedge shape. The third swing overshoots the trend channel line and leads to a reversal (in the form of a large reversal bar). However, the reversal is often not so clear, so it is best to wait for the pullback after the breakout.
If a breakout below a bull channel occurs, a trader should wait for a pullback to a higher high; if a bear setup appears, he or she may then enter a short position.
If the price falls to the lower area of the channel and a buy setup appears, the trader should wait to enter long at the bounce following the double-bottom bull flag.
The case with steep channels
If a channel is particularly steep, the spike and the channel elements together appear simply as a single spike when viewed on a higher time frame chart. This spike will usually be followed by a channel on that same time frame.
Sometimes a spike consisting of several bars may appear, but no channel follows. The last few bars of the spike may overlap to some extent, which may actually look like a channel when viewed on a smaller time frame.