Spike and Channel

What is a Spike and Channel Trend?

A spike and channel is Al Brooks' name for one of the most common shapes a trend takes: a spike, a breakout made of strong consecutive trend bars with little overlap, then a pullback, then a channel that continues in the same direction at a shallower slope. Brooks' glossary defines it as a breakout into a trend whose follow-through takes the form of a channel with less momentum, and his list of abbreviations spells out the minimum: a breakout, a pullback, then at least two more legs in a channel.

The two phases describe two different markets. The spike is urgency: one side overwhelms the other and price reaches a new level fast. The channel is the same trend once the other side participates, with overlapping bars, tails, pullbacks and what Brooks calls evidence of two-sided trading. He treats a channel as a sloping trading range in the making and teaches that spike and channel trends usually evolve into a trading range. When the channel ends, the correction often reaches back toward the start of the channel, the extreme of the pullback that followed the spike; in a bull trend, that is where buyers commonly try to build a double bottom bull flag.

The vocabulary comes from Brooks' books, Reading Price Charts Bar by Bar and the three-volume Trading Price Action series. The shape is fractal: Brooks notes that a tight, steep channel with only small, brief pullbacks is a spike on a higher-timeframe chart, so one move can be a spike on one chart and a channel on another.

How to identify a spike and channel

The spike qualifies the pattern; the channel is judged by how much weaker it is than the spike.

1. 1Find the spike: one or more strong trend bars closing near their extremes, with little overlap and no meaningful pullback, often a breakout from a range or a gap.
2. 2Mark the first pullback after the spike. Its extreme, the low in a bull trend, is the start of the channel.
3. 3Confirm the channel: the trend resumes at a shallower angle with overlapping bars, tails and pullbacks, contained by a trendline and a parallel trend channel line.
4. 4Count the legs: Brooks wants at least two legs in the channel, and three pushes in a wedge-like shape is a common ending.
5. 5Watch for the end: a trendline break followed by a failed test of the trend extreme says the channel phase is over.

How traders use it

• Trading with the spike: a strong spike is a reason not to fade. Brooks-style traders buy the first pullbacks after a bull spike, or sell them after a bear spike, often counted as High 1 and High 2 entries.
• Trading inside the channel: with-trend entries still work but lose probability as bars overlap, so traders enter near the trendline and take profits near the trend channel line. Once a channel is broad and two-sided, some fade its extremes.
• Planning the correction: after the trendline breaks and the trend extreme fails to extend, the start of the channel becomes the first target for countertrend trades and the area where with-trend traders look for a double bottom flag.
• Honest limitation: channels often run further and longer than the countertrend side expects, and the test of the channel start is a tendency, not a schedule. Fading a channel before its trendline breaks is where the pattern costs traders most.

Spike and channel vs related structures