Monday, October 31, 2011

Price Channels

Similar to Bollinger Bands, price channels form boundaries above and below the price line and can be used as indicators of volatility. Price channels are created by specifying a number of periods that will chart an n-period high or low around the price line. For example, a 20-day price channel will chart the level of the highest high in the last 20 days above the price line, and will chart the level of the lowest low in the last 20 days below the price line. If the most recent price is a new n-period high or low, it will be charted outside of the price channel. Price channels differ from Bollinger Bands in that they use maximum and minimum price values instead of moving averages as boundaries.

Price channels can be used on daily, weekly, or monthly charts and can generate buy/sell signals at points of breakouts. When the price line breaks above or below the upper or lower price channel respectively, a new high or low becomes present. When the price breaks above a 20-day price channel, the price has reached a 20-day high and could potentially begin an uptrend. In this situation, the upper price channel breakout may signify that it is a good time to buy the stock.


Price Channels
This chart for IBM illustrates a lower channel breakout (red arrow) followed by a downtrend. This new 20-day low represented a good time to sell the security, and the signal was not reversed until the price line crossed the upper price channel on June 9.

Price Channels and SharpCharts

With SharpCharts, a user can choose the length of the period for price channels. The larger the period, the more significant the channel breakouts and the more significant the signals. The second parameter (optional) allows the user to offset the price channel to the left or right. Placing a 10 in the second box will shift the price channels to the right 10 periods.