V.16:1 (50-55): Breaking Out Of Price Channels by Gerald Marisch

Breaking Out Of Price Channels by Gerald Marisch

Here's a technique based on Tushar Chande's variable-length moving average. The indicator is more responsive to market price movements than a conventional simple or exponential moving average and can be used for position trading. Take a look.

In areas of equity and commodity price analysis, it is accepted that prices can move in only three directions — up, down or sideways. These directions are called trends. In the simplest of charting techniques, trends can be evaluated by the location of closing prices in relationship to a trend’s moving average — whatever value the trader chooses to assign to the moving average lookback period. Uptrends are identified when the moving average is moving up and closing prices are above the moving average. Downtrends are identified when the moving average is moving down and closes are below the moving average.

But sideways trends are more difficult to define. Prices tend to move horizontally or in slightly up or down directions, while the moving average snakes around the closing prices. Whipsaws† are commonplace. Traders would love to know when prices enter these channels and break out of these channels, and what to do when prices are in these channels. Here’s a simple yet effective technique that may offer a clue.