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A price channel is a type of charting activity that helps to identify the type of price action that occurs within a past, current, or projected trend in pricing. The value of this type of data is that it helps marketers as well as manufacturers get some idea of which direction pricing is going in response to consumer demand, and thus makes it easier to develop strategies that allow the price to be adapted to changing circumstances. Since the channel may flow in any direction, the plotting of the channel can also be used to maintain a desirable profit level once it has been achieved.
The basic price channel is formed by identifying two traits that function as the lines of demarcation for the channel itself. In most approaches, the lower line of the channel represents the shifts or pivots related to downturns in the trend. The upper line represents activity as it relates to increases in the trend. Often, a red line is used to identify the lower pivot while a green line represents the upper pivot.
It is important to note that a price channel can flow in any direction. The trend may indicate a upward movement, a downward movement, or even a movement from side to side. The direction of the channel will depend on what is happening with the relationship between the supply and demand for the product or products involved in the trend. Depending on what is happening in the marketplace, the degree of support and resistance occurring will affect the direction of the channel. For example, if demand is high and supply is low, this may lead to an increase in price as consumers scramble to secure what they want while it is still available. By contrast, if the supply is high and consumers are not buying the products at their current prices, a decision to lower the price and thus stop the downward slope of the channel may take place.
Investors can make use of the price channel model to buy and sell securities. A basic approach is to buy when the closing price of a given security is higher than it has been in a specific number of trading periods. The second component to the strategy requires the investor to sell when the closing price has decreased to a level that is lower than it has been for that same number of periods. Following the flow of the price channel helps to increase the chances of earning a return, while also helping to minimize the possibility of losing money on the investment.