Line: A Line is a straight line that best fits the prices between a starting price point and an ending price point. A "best fit" means that a line is constructed where there is the least amount of space between the price points and the actual Line. The Line is mainly used to determine trend direction.
Traders usually view the Line as the fair value price for the stocks. When prices deviate above or below, traders may expect prices to go back towards the Line. As a consequence, when prices are below the Line, this could be viewed by some traders as a good time to buy, and when prices are above the Line, a trader might sell. Of course other technical indicators would be used to confirm these inexact buy and sell signals.
Upper Channel Line: A line that runs parallel to the Line and is usually one to two standard deviations above the Line.
Lower Channel Line: This line runs parallel to the Line and is usually one to two standard deviations below the Line.
The upper and lower channel lines contain between themselves either 68% of all prices (if 1 standard deviation is used) or 95% of all prices (if 2 standard deviations are used). When prices break outside of the channels, either: Buy or sell opportunities are present. Or the prior trend could be ending.
Channel Possible Buy Signal
When price falls below the lower channel line, and a trader expects a continuation of the trend, then a trader might consider it as a buy signal.
Channel Possible Sell Signal
An opportunity for selling might occur when prices break above the upper channel line, but a continuation of the trend is expected by the trader. Other confirmation signs like prices closing back inside the channel might be used to initiate potential buy or sell orders. Also, other technical indicators might be used to confirm.
When price closes outside of the Channel for long periods of time, this is often interpreted as an early signal that the past price trend may be breaking and a significant reversal might be near. Channels are quite useful charting tools. In addition to identifying trends and trend direction, the use of standard deviation gives traders ideas as to when prices are becoming overbought or oversold relative to the long term trend.
Period: (100) The number of bars to use in the calculation.
This Channel Has 1st, 2nd, and 3rd Deviation lines also the MId Deviation Lines are added for 1.5 and 2.5 area.
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