Trend Channels, Overshoots & Undershoots – Explained Simply (With Strategy)

A trend channel is a visual tool that shows the direction and range of price movement. You draw it by:

Connecting higher lows in an uptrend or lower highs in a downtrend (this is your main trendline).

Then, draw a parallel line across the highs in an uptrend or lows in a downtrend — this becomes the channel line.

So, you get a channel like a road where the price moves between the lines.

Overshoot – What Is It?

An overshoot happens when the price breaks above the upper channel in an uptrend (or below in a downtrend) for a short time.

Why it matters: It can be a fake breakout or a sign of strong momentum.

How to trade overshoots:

If price breaks out of the channel but comes back in quickly, it’s usually a false breakout → You can enter a reversal trade back toward the other side of the channel.

If price breaks out with strong volume, it may be a real breakout → You can enter in the direction of the breakout after confirmation (e.g., retest of the line or strong candles).

Example (Uptrend):

Price breaks above the channel and comes back down = short entry.

Price breaks above, retests the channel top, and goes up = long entry.

Undershoot – What Is It?

An undershoot is when price doesn’t reach the other side of the channel. It "runs out of steam."

Why it matters: This signals weakening momentum and can be a warning of a trend reversal.

How to trade undershoots:

If in an uptrend, price fails to reach the upper channel line and then breaks below support = look for short setups.

If in a downtrend, price fails to hit the lower channel line and then breaks resistance = look for long setups.

Example (Uptrend):

Price touches lower line → goes halfway up → reverses down = possible trend weakening → watch for breakdown.