Price Channels suggest possible buy and sell signals based on price breakouts.
- Upper Price Channel: The highest high over a user-defined time period.
- Lower Price Channel: The lowest low over a user-defined time period.
The user-defined time period is generally 20 periods. To further illustrate how a price channel is created a chart of the Nasdaq 100 ETF (QQQQ) is shown below:
Price Channels are used mainly to identify price breakouts. The possible buy and sell signals are shown below in the chart of the QQQQ’s:
Price Channel Potential Buy Signal
A trader might buy when price closes above upper bands. This is similar to a trader buying a breakout above resistance, where the resistance just happens to be whatever the highest high was of the past 20 trading days.
Price Channel Potential Sell Signal
A trader might sell when price closes below lower bands. This would be like selling a breakout below support, but the support in this case is whatever the lowest low was of the previous 20 trading days.
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