Envelopes and Methods of Price Containment
■ (^) For long entries, exit after price breaches the significant low of the last 2 or 3 bars.
■ (^) For short entries, exit with a more responsive upper band, with periods rang-
ing from 2 to 10 periods, depending on the degree of responsiveness required
(see Figure 12.27).
■ (^) For short entries, exit after price breaches the significant high of the last 2 or 3 bars.
■ (^) Execute a chandelier exit.
■ (^) Use an appropriate moving average exit.
Bollinger bands are able to adapt to volatility based on the activity of their
central value. Fixed‐percentage bands are able to account for larger fluctuations
at higher prices based on the price of their central value. Most bands except price
channels and Darvas boxes are able to account for, or adjust to, price activity. Un-
fortunately, price channels can only adjust to volatility by continuously changing
the lookback period. There is no central value that the bands may use as a means
of determining price activity. So it is up to the user to determine the appropriate
lookback period for a particular period in the market.
The best way to set the lookback period for a price channel is to first determine
the periodicity of a dominant cycle in the market. Once the periodicity of a domi-
nant cycle is known, the trader may set the price channel to the quarter‐, half‐,
or full‐cycle period lookback. The quarter cycle provides for a faster turnover in
profit but it is potentially more susceptible to market noise and false breakouts,
being closer to price action.
It must be noted that with price channels, traders do not buy at support and
sell at resistance. The upper and lower bands of the price channel do not represent
support and resistance, but rather new highs and new lows based on a selected
lookback period. Nevertheless, some traders have reported that a reverse strategy
may be more profitable, that is, by selling when a new high is indicated and buying
Figure 12.27 A Price Channel with Relatively Faster Short Exits on the Daily Nikkei
225 Chart.
Source: MetaTrader 4