Introduction
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.
Example
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.