Asymmetric price channel construction for congested markets

A rest after a trend that does not reverse

When a trend ends without a reversal, the following rest is typically a sideways range bounded by horizontal support and resistance. That rest is often described as a flag, pennant, triangle, or rectangle.

Market observers commonly treat trending as about 25% of the time, so the end of a trend is expected to produce a genuine reversal in only about one of four chart patterns. The more common sequel is a congested market rather than an immediate turn.

When a single curve loses the range extremes

A support or resistance curve launched from the end of a trend can drift into the middle of a later sideways range. Once it sits in that mid-range, it fails to mark the swing highs and lows that define the range.

How a price channel differs from bands and envelopes

Trading bands change their distance from a central tendency as volatility changes. Envelopes sit at a fixed percentage of that center. Price-channel boundaries are instead pinned to observed upper and lower extremities and function as trendlines around the center.

Fitting independently displaced boundaries

To build the displacement channel, the upper boundary is fitted to the first swing high at or after the launch of the central curve, and the lower boundary to the first swing low. Each boundary is a visually chosen percent displacement from that curve.

The two outer bands are displaced independently, so the gap from the central curve to the upper boundary need not equal the gap to the lower boundary. In the stated construction, the percent offset of the boundary curves is almost always below 1% on intraday charts and always above 1% on daily charts.

The channel bands are nonlinear. Their offsets are reviewed at launch and again whenever a new swing high or low marks a wider or narrower extreme.

Reading turns, breaks, and a pierced center

A turn against an outer band is treated as a hypothesis that price will reach at least the central curve or the opposite band. A break of an outer band is treated as a possible trend change, after which that boundary may switch its support or resistance role.

When price pierces a central support curve in an uptrend, the lower channel band is used as the working support line. In a downtrend the upper channel band is used as the working resistance line.