TASC's August 2023 edition of Traders' Tips features an article written by Stella Osoba titled “Using Price Channels.” The article offers a basic look at using price channels, with a primary focus on Donchian channels. Following the article, the script provides an example of how to calculate and utilize the Donchian channel to gain insights into the price behavior and potential trend movements.
The use of price channels is a long-standing and fundamental charting technique commonly associated with trend-following trading strategies. Price channels help identify the trend on the chart and facilitate trading in its direction. The Donchian channel, in particular, consists of three lines. The upper line is conventionally calculated as the highest high over a specified lookback period, while the lower line is defined as the lowest low over the same period. The central line represents the midpoint between the upper and lower lines.
The Donchian channel provides a simple and intuitive visual representation of price behavior. Breaking through the lower line, for instance, can indicate weakness and selling pressure, while breaking through the upper line can signal buying pressure. By observing these breakout points, one can gain insight into potential beginnings or endings of long-term trends. However, it is important to note that breakouts often lead to price reversals, so they should be carefully evaluated
To illustrate a simple Donchian trading system, this script calculates and plots the channel lines, as well as potential entry points for long positions (green triangles) and short positions (red triangles).
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