According to the statistical theory, almost 70% of price actions that can be plotted fall into the Standard Deviation Channel. Granted both the lower and upper lines are positioned below and above the trend line, the deviation can easily be distinguished. Alongside, granted the number of deviation increases to 2 for each line, it is said that more than 90% are expected to fall into the channel.
Here are more facts about the channel:
- It can be used to recognize any stable trends in the current market. For instance, with an exponential moving average, it can point out a signal that suggests there is secondary reaction.
- It can be useful for swing traders since it consists of lines that serve as support and resistance levels. Consequently, prices on the deviation channel are expected to exceed the borders shortly. In the event they stay out of bounds for a time longer than usual, traders can conclude that there is a possibility of a trend occurring.
- It can be useful for traders who are known to set stop loss orders. Via careful analysis, a trader can identify a handful of information such as when the price reaches the upper border, when the next trough should be set, and when the stop level is at a position lower than its previous position.
- It can indicate 2 points. One, it can show that any data is far from the mean. Another, it can suggest that data is closely clustered.
- It is composed of 2 lines – both of which are in line with the Linear Regression Trend Line. The channel is located at the middle and the lines serve as lower and upper borders. Apart from making sure they remain parallel, it notes that a certain distance is maintained by specifying a number of deviations.
- Since its placement is in the middle of two lines, it is also known to some as the equilibrium price line. Among the things it could indicate best are the changing prices. In the channel, if a deflection, whether pointing up or pointing down, can be identified, it means that super-activity of both buyers and sellers is ongoing.
- The different techniques of setting it up depend on traders’ preference. Although the distance of both the lower and upper borders can vary, they are not quite bothered since they stick to the primary objective of making sure the lines are equidistant. And, while 2 is more than enough for some, 3 standard deviation channels work for others.
References: facts have been taken from http://en.wikipedia.org/wiki/Standard_deviation , while technical points have been shared by Mr. Jams, an analyst from Admiralmarkets.ae – An Arabic Forex broker.