Price Channel Indicator | Technical Indicators | BCI Futures
The Price Channel indicator is used to detect breakouts of significant support and resistance areas. The upper channel is drawn at the highest high of x bars ago. The lower channel is drawn at the lowest low of x bars ago. The channel is displaced backwards by one bar so that the highest high and lowest low of the current bars are not used in determining the channel position. A penetration of the upper channel is a sign of significant market strength. A penetration of the lower channel is a sign of significant market weakness.
The closer prices move to the upper band, the more overbought the market; the closer prices move to the lower band, the more oversold the market.
While the conventional usage always has the security rated as either overbought or oversold, a better method is to allow for a neutral reading when prices fall about halfway between the upper and lower bands. Applying this method, a security would only be rated as overbought or oversold if it were actually very close to or beyond either the upper or lower band. In addition, significant consideration should be given to the price momentum. A security which has entered into overbought or oversold territory may continue to become even more overbought or oversold before reversing. For this reason, look for evidence of price weakness/strength before expecting a reversal.
Kaufman, Perry J. The Commodity Trading Systems & Methods. John Wiley & Sons, Inc. New York. 1978.