The Price Channel consists of two bands running above and below a Moving Average. The distance to the Moving Average, which need not be plotted, depends on the parameters which are set according to the required sensitivity.
A percentage value is added to the value of the Moving Average, in order to obtain the upper band. To obtain the lower band, a percentage value is subtracted from the value of the Moving Average.
where SMA is the Simple Moving Average.
The parameter of the Moving Average can assume any value between 1 and 500. The standard setting is n = 10. The two parameters used for setting the percentage deviation are known as the "upper range" u and the "lower range" d. They can assume any positive value. The standard setting is 1.
As is the case for all channel indicators, when the instrument breaks out of the channel, this can be interpreted as a trading signal. For example, when the instrument closes above the upper limiting band in a market with an up trend, this is considered a buy signal. In a really trendless market, the instrument should not run near the bands for any length of time. If this does happen or if the instrument even breaks out, this may signal a new trend.
This article and displayed results, created with the available presentation and analysis tools, are used solely for information and do not provide investment advice or recommendation of any kind. All rights reserved. Reproduction, edits and other unauthorized use are under civil and criminal law.