Simple price channels are defined by upper and lower price bands which either run along a set number of points or a certain percentage distance away from the security's closing price. More sophisticated methods can then help develop your understanding of the market action, to the potential benefit of your trading profit and loss account.

Chartists use Keltner channels by drawing upper and lower lines displaced from a central average based on the typical price (i.e. (h+l+c)/3). Later versions of Keltner utilise the average true range (ATR) for each session computed over a set look-back period. The ATR determines where the bands sit and thus reflect price volatility. This makes them very similar to STARC channels which focus on a simple six-period average of closing prices and then add and subtract a doubling of the fifteen-period ATR added to produce the bands.

Several sets of Keltner band lines are often drawn to depict a number of multiples of ATR and generate support or resistance price objective levels. Failure to break through these zones can warn of a trend reversal while the upper and lower bands will inform price peaks and troughs when a security s range-bound.

Developed in the early 1980s, the Bomar Band technique is a further attempt to create adaptive price channels. It highlights the deviation of the highs and lows from a moving average of closing price. In a rising market the upper channel line develops further above the average than the lower channel line sits below it. The opposite applies in a falling market. A default of 1.44 standard deviations is said to contain 85% of price action on an historical basis, so any moves outside the channel are noteworthy events. The vertical distance between the bands and the average reflects price volatility during the look-back period, which in this case is usually 250 . In contrast Bollinger bands use standard deviations derived without differentiating between the deviation of high and low prices from the average and so are always equidistant from the middle average line.

There is no hard-and-fast rule about either the number of standard deviations used or the look-back period but all band trading should respect the market when prices cross their central average. A move above the indicator is a good sign and drop below it a bad one and these signals can be used to time trades or inform stop-losses and trigger points.

The chart for BAT (BATS) shows a series of Keltner bands as they form price channels. The analysis is based on a 20-period exponential average (blue line) and applies three sets of bands calculated using a 10-period average true range (ATR). The closest set to the average is one ATR either side of it. The next set is two ATRs away and the last batch three away. The lines provide clear support and resistance.

Last summer's sideways move at AstraZeneca (AZN) twice tested the lower Bomar band for support. Late October's break-out above the upper band flagged a fresh upward move and the shares stormed 22% higher by February, drawing support from the average as they advanced.