Channels are banded trend-following indicators, usually lagging, with an upper and a lower line, at equal distance from a middle line (usually called the midpoint). The area between those lines is the channel. They are commonly used for daily periods but work for any period. Their usage is straightforward to understand. Breakouts of the upper or lower line -which are relatively rare- indicate possible trading signals based on extraordinary strength resp. extraordinary weakness.
Overbought and oversold conditions can occur when price reaches either the upper or lower line. A sideways moving channel with price oscillating around the midpoint identifies a flat trend. There are several kinds of channel indicators, usually named after their creators, such as the
Donchian Channels, the
Keltner Channels and other price channels. Several modifications can be made to each of them and to reduce the number of fake signals they can be used in combination with other indicators.
