Like ascending and descending channels, horizontal channels are formed by drawing trend lines for both high and low prices on a chart.
The difference between the other two is that a horizontal channel is characterized as having equal highs and lows.
Horizontal Channel as Support and Resistance
Like all trend channels, price trades between support and resistance.
If the price is falling towards support, it indicates that it will reverse and rise again.
If the price is rising towards resistance, it indicates that it will reverse and fall back again.
Many traders find it “cheap” near support and “expensive” near resistance.
Horizontal Channel Breakout
A break in prices outside of either trend line represents either a buy or a sell signal to traders.
If prices break above the upper resistance trend line, a buy signal is generated.
If prices break below the lower support trend line, a sell signal is generated.
Many traders believe that a horizontal trend channel doesn’t represent a horizontal trend as such, but merely a temporary interruption in a prevailing trend in either direction.
Other traders believe that a horizontal channel represents a “calm before the storm” of a major trend reversal.
Because of this ambiguity, horizontal channels should only be used in conjunction with other technical analysis tools.
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