the hAndbook of technIcAl AnAlysIsalgorithmic‐based bands
Price channels comprise upper and lower bands that signal new breakout trades.
The upper band represents the highest high of the last N periods and similarly, the
lower band represents the lowest low of the last N periods. The price channel may
be employed either:
- Unidirectionally
- Bidirectionally (Stop and Reverse, SAR)
For unidirectional long entries, that is, only taking trades in the direction of
the predominant uptrend, whenever the upper band is violated the trader initiates
a long entry with the stop usually placed just below the lower band. Similarly,
for unidirectional short entries, that is, only taking trades in the direction of the
predominant downtrend, whenever the lower band is violated the trader initiates
a short entry with the stop usually placed just above the upper band.
When traded bidirectionally, price channel trading transforms into a stop and re-
verse (SAR) approach, with the trader ideally being in the market on a perpetual basis.
As a SAR approach, the trader enters long at a new N‐period high and exits the long
position when a new N‐period low is made, immediately establishing a short position
at that new low. Irrespective of whether the price channel is traded unidirectionally or
bidirectionally, both approaches are essentially regarded as trend following.
It should be noted that normally no new long entries are initiated even though
a new buy is indicated, and similarly with short entries. This applies to both uni-
directional and bidirectional approaches. This only exception is when an entry has
been rendered riskless by rolling the initial stoploss into a protective position. This
way, the overall percentage risk never exceeds the maximum risk allowable. To
Figure 12.23 Linear Regression Bands on the 4‐Hour Bund Futures Chart.
Source: MetaTrader 4