Price channel

The Price channel indicator is a trend indicator based on a simple and effective rule: in an uptrend, price forms higher highs, and in a downtrend, lower lows.

The Price channel indicator is one of the most effective trend indicators. This is partly due to the mechanics of the indicator, which makes it impossible to miss a trend move. Consistently using price channels to find an entry point at the start of a trend ensures that you don't miss the trend.

A price channel is a pair of parallel trend lines that form a chart pattern for a stock or commodity. Channels can be horizontal, ascending, or descending. When prices pass and stay through a trend line representing support or resistance, the trend is considered broken and a "breakout" occurs.

The Price Channel indicator lines are support and resistance levels that vary with the price. A sell signal is generated when the price reaches the upper boundary and a buy signal - when the price reaches the lower one.

When setting up the indicator, it is important to select the correct period of the price channel, it should closely match the used timeframe. By default, the period value is 10. Occasionally two Price channel indicators with different periods are set on the chart at once. In this case, buy signals are the breakaway of the support line with a shorter period from the line with a longer period. Conversely, a sell signal is a breakaway of the resistance line with a shorter period from a similar line with a longer period. For convenience, the color of the indicator lines can be changed so that they differ.

If the parameter is selected successfully, the channel will correspond to the state of market equilibrium, and all price outputs beyond its limit should be accompanied by a price return. About 5% of prices should go outside the lines, 95% - inside.

Price channel breakout

The breakout of trading channel boundaries can be an important signal for trading. A breakout implies a subsequent price movement in its direction. The breakout reliability can be assessed by the following factors:

• Trading channel duration: the longer it is, the larger the breakout in the future can be;

• Channel width: breakouts of narrow channels tend to provide particularly reliable trading signals;

• Breakout confirmation: the presence of the fundamental reasons and supporting purchases (sales) strengthens the trend.

All the forces of supply and demand are represented by price. The predominance of one force creates trend direction. Trend channels occur in all time frames and in every asset class, like futures, stocks, mutual funds, etc., and are useful for trading or investing.

Calculation

The Price Channel calculations are simple:

• The upper band (line) of the channel is constructed as the highest high over a specified period of time (the specified number of price bars);

• The lower band (line) of the channel is constructed as the lowest low over a specified period of time;

• The middle line is constructed as the average of the highest high and the lowest low.

Main parameters

Period of price channel – allows setting the number of periods for which price highs and lows will be determined, 10 by default.

The indicator looks as follows on the chart: