What is a Price Channel?
The price channels are basically two parallel lines, drawn above and below the price security. The upper line is set at the period high, and the lower line is set at the period low. So, for a 20 days price channel, the upper channel would be equal to 20 day high, and the lower channel would be equal to 20 day low.
A price channel is created, from the technical development of two parallel lines. The lower trend line is drawn when the price pivots higher, and the upper trend line is drawn when the price pivots lower. The steepness of declines and the resistance the security, which meets at the lower trend line, determine the direction of the price channel trend.
An upward trending price channel will have trend lines with a positive slope, indicating that the price is trending higher, with each price change.
A downward trending price channel, will have trend lines with a negative slope, indicating that the price is trending lower, with each price change.
Key points to remember:
- A trader might buy, when price closes above upper bands.
- A trader might sell, when price closes below lower bands.
- Investors using both long positions and short positions, have the greatest opportunity to gain, when a security follows a clearly delineated price channel path.