Thursday, February 16, 2017 12:17:41 AM
Price Channels Trend Identification
Price Channels can be used to identify strong moves that may result in lasting trend reversals. Basically, a move above the 20-day Price Channel signals a new 20-day high. A move above the 20-week Price Channel signals a new 20-week high. Obviously, a 20-week high is more consequential than a 20-day high. The choice of timeframe depends on your trading timeframe and rational for using Price Channels. For example, chartists can use weekly charts with 20-week Price Channels to determine the big trend and overall trading bias.
The chart above shows weekly prices for the Nasdaq 100 ETF (QQQQ) over a 4 1/2 year period. The green arrows mark weekly highs above the upper channel line that signaled the start of an uptrend. The red arrows mark weekly lows below the lower channel that signaled the start of a downtrend. These channel breaks caught a few good trends, but there were two whipsaws or bad signals. Indicator signals are not perfect and there will be whipsaws. It is just part of the game
Signals can be filtered further by using a close-only line plot. The second chart shows the same 4 1/2 year period with 20-week Price Channels and QQQQ as a close-only line plot. This eliminates the intra-week highs and lows. Notice that QQQQ did not close above the upper channel line in May 2008 or below the lower channel line in May 2010 (blue arrows). Using a close-only price chart reduces volatility and signals.
Price Channels can be used to identify strong moves that may result in lasting trend reversals. Basically, a move above the 20-day Price Channel signals a new 20-day high. A move above the 20-week Price Channel signals a new 20-week high. Obviously, a 20-week high is more consequential than a 20-day high. The choice of timeframe depends on your trading timeframe and rational for using Price Channels. For example, chartists can use weekly charts with 20-week Price Channels to determine the big trend and overall trading bias.
The chart above shows weekly prices for the Nasdaq 100 ETF (QQQQ) over a 4 1/2 year period. The green arrows mark weekly highs above the upper channel line that signaled the start of an uptrend. The red arrows mark weekly lows below the lower channel that signaled the start of a downtrend. These channel breaks caught a few good trends, but there were two whipsaws or bad signals. Indicator signals are not perfect and there will be whipsaws. It is just part of the game
Signals can be filtered further by using a close-only line plot. The second chart shows the same 4 1/2 year period with 20-week Price Channels and QQQQ as a close-only line plot. This eliminates the intra-week highs and lows. Notice that QQQQ did not close above the upper channel line in May 2008 or below the lower channel line in May 2010 (blue arrows). Using a close-only price chart reduces volatility and signals.
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