Constructing adaptive horizontal price channels

A channel is two price levels

Horizontal price channels are constructed from two price levels that enclose movement between parallel support and resistance. Once those lines are in place, later acceleration, slowdown, or range compression can be observed on a chart.

A price channel is a pair of parallel support and resistance lines that enclose price so a later break, stall, or compression can be treated as a falsifiable setup. A horizontal channel uses two price levels as those bounds. It marks consolidations and the start of a new trend, phase, box, or stage.

Donchian windows and the current bar

A Donchian, or x-bar high/low, channel is built with the maximum and minimum over a lookback period. The highest high and lowest low become the resistance and support lines.

The current bar is excluded from those max and min calculations. Including it would reset a new extreme as the channel bound and prevent an observable violation.

Upper and lower Donchian windows need not match. One illustrated construction used a 59-bar high of 27.21 against a 16-bar low of 20.02.

Choosing the lookback by trial of nearby windows is subjective and risks fitting the channel to one chart, because the same two price levels do not transfer unchanged to another series.

Length and width as separate axes

A channel has two construction axes. Channel length is how far a given price level remains uncrossed. Channel width is the vertical gap between the two lines. The two lines may have different lengths.

At a fixed price level, extending the uncrossed horizontal line can add length without widening the band. In the 27.21 example the 59-bar high remained the high through 101 bars, adding 42 bars of length.

Searching for the longest uncrossed line

A chartmill channel is an adaptive horizontal channel. At a given price increment it searches for the longest uncrossed horizontal line, computes upper and lower bounds independently, and may stop the search when a candidate line drifts more than 20% from the prior close.

Length-to-width balance is the construction rule that prefers a longer line at the same price over a slightly wider band, and stops searching when further lookback would make the line drift too far from recent price.

Scanning the finished band

Because length and width are specified together, the resulting channels can be scanned algorithmically, aligned with intermediate swing highs and lows, and used to mark compression that often precedes a break of the band.

The ratio of the two channel-line lengths is a construction-based readout of trend maturity. Unequal persistence of the upper versus lower bound is treated as information about how developed the move is.