The Mean Reversion Channel indicator helps to visually identify areas of support and resistance in a price movement.
The indicator is based on the mean reversion theory. Its concept is widespread in the financial sphere and consists in the fact that the price tends to return to its average value after a rise or fall.
Peculiarities of the indicator’s work
The indicator builds two lines – upper and lower, which form channels. These lines are calculated on the basis of moving average prices for a selected period of time.
The indicator contains two channels:
- Internal channel (Dynamic support and resistance)
- External channel (Overbought/oversold zone).
The price touching the upper or lower line of the channel is a signal to enter the deal. Also, a breakdown of the channel boundaries can be a signal for potential continuation of the movement.
Channel width reflects price volatility, so when working with this indicator, you can estimate the volatility to set the overlap grid.
Note
To visually evaluate the channel boundaries on the chart, go to TradingView, click on Indicators, then type Mean Reversion Channel in the search box, having previously added the indicator to your favorites.
