Price Channels is a helpful technical analysis indicator to determine 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 buy and sell signals are shown below in the chart of the QQQQ's:
Price Channel Buy Signal
Buy when price closes above upper bands. This is like buying a breakout above resistance, the resistance just happens to be whatever the highest high was of the past 20 trading days.
Price Channel Sell Signal
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.
Price Channels offer an easy to follow method of buying and selling stocks, futures, or currency pairs.