Introduction to the Price Channel Indicator
Trend direction can be objectively identified based on average price movements. This is why most indicators use averages as a means to identify the trend. Trends can also be identified based on price action. This is because price would typically create higher highs during an uptrend, and lower lows during a downtrend. The Price Channel Indicator has both elements, combining average prices and price action when identifying trend directions.
What is the Price Channel Indicator?
The Price Channel Indicator is a trend following technical indicator which plots a channel based on price action movements. It plots a channel composed of three lines. Traders can interpret trend direction and trend reversal based on how price interacts with these three lines.
How the Price Channel Indicator Works?
The Price Channel Indicator plots the channels based on the highs and lows of price action. It is preset to detect the highs and lows of price over the past 14 bars. It then plots the upper line of the channel based on the highest high over the past 14 bars, and the lower line of the channel based on the lowest low over the past 14 bars. The middle line is basically the median of the two lines. It is computed by adding the highest high and lowest low over the past 14 bars, then dividing it by two.
How to use the Price Channel Indicator for MT4
The Price Channel Indicator has one variable which can be modified. This is the number of bars it would base its computation on. This can be modified on the “Channel Period” variable within the indicator’s settings.
The Price Channel Indicator can be used as a trend direction indicator. This is because price action would typically stay on the upper half of the channel during an uptrend, and on the lower half of the channel during a downtrend.
It can also be used as a trend reversal signal based on the crossing of price action over the middle line of the channel. However, this should be in confluence with other reversal indications.
Buy Trade Setup
When to Enter?
Identify a bullish trade setup based on price action. Open a buy order as soon as price closes above the middle line of the Price Channel. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as price closes below the middle line of the Price Channel.
Sell Trade Setup
When to Enter?
Identify a bearish trade setup based on price action. Open a sell order as soon as price closes below the middle line of the Price Channel. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as price closes above the middle line of the Price Channel.
Conclusion
The Price Channel can be a very effective short-term trend following indicator. This is because the Price Channel indicator identifies trend direction based on price movements. However, when used as a basis for a trade setup, it should be used in confluence with other trade setups merely as a confirmation of a trend reversal.
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