| Updated: September 12, 2025Trading within a channel
This lesson will cover the following
- How do experienced traders usually trade a channel?
- How should beginners trade a channel?
- A conventional trading scenario
- Another trading approach
More experienced traders trade in the direction of the trend, but not necessarily
If a trader spots the beginning of a channel, he or she will usually enter positions in the direction of the trend. However, as the price approaches a key level within the channel and trading becomes more two-sided, more experienced traders will begin entering counter-trend trades. As a rule, at the beginning of the channel it is appropriate to go long below the lows of the bars. With prices progressing towards the resistance zone of the channel and with the appearance of overlapping bars, larger pullbacks and bear trend bars, many traders will prefer to go short above the bars rather than go long below them.
In a bull channel, traders without consistent gains should abstain from taking short signals. Even if there are acceptable signals, traders should not look to go short, because the market is always-in long (any time traders are forced to decide between going long or going short, they feel more confident in long positions; thus, the market is always-in long at that moment. However, a sudden move in the direction of the trend must be witnessed before traders can gain such confidence.)
For them to go short, the market needs to be clearly always-in short. This will require a sharp bearish move that breaks below the channel and is followed by further price action.
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Beginners should always trade in the direction of the trend, if at all
Within a channel, beginner traders should enter only in the direction of the trend. As all channels attempt to reverse and a large number of pullbacks occur, beginners may incur repeated losses. If they spot a bull channel developing, they should look only to go long. Within a channel, traders with no experience would do better to wait for the most distinct setups to appear, even if it means missing the entire trend.
A conventional trading scenario
As channels usually extend further than most market participants anticipate, in a bull channel the uptrend often exceeds the first one or more obvious resistance levels and reaches another resistance, where a sufficient number of institutional buyers and sellers are convinced that the price has climbed enough and is unlikely to continue higher. At such a level the buying pressure eventually ceases. Institutional bulls take their profits (selling their long positions), while institutional bears enter the market and begin selling heavily. This may lead to a large retracement or even to a reversal into the opposite trend.
The uptrend ends with a breakout of the upper area of the channel, where bears with limited capacity desperately buy back their short positions, while bulls with limited capacity, looking for a lower price, finally enter a long position.
Institutional bears will usually wait for the sudden breakout and then begin selling heavily, as they suppose this is a short-lived chance to sell at a high price level. It is short-lived because the price is unlikely to remain that high for long.
Institutional bulls will close their long positions after the sudden move up has occurred. They will not go long again until the price returns to the start of the channel, the level where they originally entered their profitable trade. Institutional bears are aware of this, so they will need to take their profits and exit precisely where the institutional bulls intend to buy again. This leads to a rebound, which is usually followed by a trading range, as both sides are now unsure what the market’s next move will be. Where there is a trading range, there is uncertainty in the market.
Another trading approach
Strong (institutional) bears may consider another approach as the channel continues to develop upwards. They may prefer to sell as prices rise (scaling into their positions) because they suppose that the movement to the upside may be limited. As these strong bears continue to sell, this boosts selling pressure in the market. A greater number of bars with bear bodies, bars with upper wicks and bars with lows below the low of the preceding bar begin to appear on the chart. These bears expect a breakout of the channel to the downside and even prices to return to the start of the channel itself.
Instead of waiting for a reversal to occur, these strong bears continue selling as the bull channel develops, because they are looking for an opportunity to go short at the best possible price. The reversal may be rapid and strong, and they may find themselves going short much farther below the upper area of the channel than they believe will be profitable.
They are likely to scale into their positions in some of the following ways – by placing a limit order to sell above the high of the preceding bar, by going short above a minor swing high in the channel, or at any test of the trend channel line (upper line). Once prices reverse direction, these bears may hold the entire position if they anticipate a huge reversal, or they may exit the market at their profit target (a test of the trend line of the channel). Their exit may also be at the entry price of their first short position – close to the beginning of the channel.
In a bull channel such a strategy, however, is appropriate only during the first two-thirds of the trading day. Or, if one is to trade within a channel during the second half of the day, he or she had better enter only in the direction of the trend (to go short below the low of the preceding bar).
If prices continue to move higher than these bears expected, they will be forced to close (buy back) their entire positions at a loss. In such a case, a climactic breakout to the upside will occur at the end of the channel. These traders do not expect a pullback to occur soon (which would enable them to buy back at a better price), so they prefer to close all their short positions at a loss. Many of these bears are momentum traders, so they will probably enter long positions immediately. All momentum bulls will continue going long as prices surge. They believe they have an advantage because the chance of the next pip being higher rather than lower is over 50%. As soon as the momentum ends, both sides will exit their long positions.