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PRICE CHANNELS
Doug Schaff
FX-Strategy
| Characteristic: | Price Breakout Indicator | |
| Parameter Defaults: | Length | 10 controls the measurement period for the channel |
| Plots: | Upper | |
| Lower | ||
| Middle | ||
Price channels are a graphic representation of channel breakouts. Some fund managers work on rules in which they will buy and sell only when price has penetrated a channel. They wish to avoid all the noise of shorter term time frames and look for the bigger trending opportunities. The breakout points are commonly derived of a break of the highest high or the lowest low for a particular period. They will either use these signals on their own and will always carry a position as a new trade exits the previous trade. The alternative is to enter a trade and use a trailing stop to organize the exit, then only enter again when the opposite channel is broken.
Additionally they will consider a correction against the direction that breaks clearly through the central line (High Band + Low Band divided by 2) as an indication of a slowing of the trend.
The chart above displays a 40 period channel on a 2-hour chart. It can be seen that a simple reversal on opposite channel break will "give-back" much of the profit. Thus a strategy using a trailing stop is aimed at retaining as much profit as possible. Also note how divergences can be used effectively with channel reversals.
