What Exactly Is a Channel?
In technical analysis, a “channel” refers to the trading range between support and resistance levels on a price chart; in business, it describes the system by which goods and services are distributed to customers.
KEY POINTS
- For businesses, a channel is a way to get their products to customers, while for traders, a channel is the area of support and resistance on a price chart.
- The term “distribution channel” refers to the various routes that goods take on their way from the manufacturer to the end user.
- The highs and lows in a security’s price over a given time period can be visually represented using a chart pattern called a price channel.
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Understanding Channel
In the world of economics and finance, a channel can refer to either a:
- Distribution Channel: To move a product or service from its point of origin to its final destination, a distribution channel is set up.
- Price Channel: A security’s price may be said to have “channeled” if it has been trading within a predetermined range delineated by prior support and resistance levels.
Distribution Channels
A product’s distribution channel is the set of steps that take it from the manufacturer to the end user. The level of complexity of these routes varies greatly from one product to another.
The most rudimentary form of distribution is the direct sale of goods from producer to consumer (as when a farmer sells his produce at a farmers market).
Sometimes products go from producers to brokers to wholesalers or retailers and then to consumers, but other channels are much more convoluted.
The price of delivering a product to the end user rises with each additional link in the supply chain. A similar term is “margin stacking,” which describes this practice.
It is common practice for companies to cut costs by streamlining the number of links in their distribution chain.
It’s important to remember that not all channels converge on the final consumer. Some, such as a B2B marketing channel, involve dealings between businesses rather than consumers.
A technology firm may produce an integral part, like a computer chip, and then sell it to other firms that incorporate it into their own goods.
Bringing a process in-house and handling production in-house can sometimes be more cost-effective, which in turn can lead to a rise in profits by decreasing the price at which products and services are sold. We see vertical integration at work here.
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Price Channels
The highs and lows in a security’s price over a given time period can be visually represented using a chart pattern called a price channel.
Generally speaking, a price channel is considered to be reliable and useful for stock analysis if and only if the oscillation exhibits observable symmetry. Industry experts recommend having at least four points of contact (two each for the upper and lower lines).
Channel prices can rise, fall, or remain flat, but the two lines defining the channel must be roughly parallel to one another.
A trader can use a channel to anticipate price highs and lows if the stock is moving in predetermined high and low ranges. An investor could buy shares when the price of the stock touches the lower channel line and hope to see a rise in price to the upper channel line, for instance.
Moderately volatile stocks with consistent oscillations are ideal candidates for channel analysis. If a price moves up after breaking out of a channel, that’s seen as bullish, while a move to the downside is seen as bearish.
Price movements outside of a price channel for brief periods of time are common and should be taken into account when confirming a breakout using additional indicators.
When prices suddenly start moving outside of the channel, the channel’s predictive power is completely nullified.
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