Trend channels

As we previously saw with the channel breakout method, channels are a good source of support and resistance. But channels can also be used when prices are trending.


It was a while back, before I started trading, that I realized that curve fitting human endeavors is often an overkill; there are so many unknowns that a good plain and simple straight line is all that is needed to do a good job at estimating future developments.

If we’re going to be using a straight line, the best fit is the linear regression, where we minimize the differences from a straight line to the actual plotted values. Once we have this line, we may enclose it within a channel which includes the rest of the plotted values. I prefer a 200 dot look back all inclusive channel, parallel and symmetrical to both sides of the linear regression line.

Prophet makes it easy, it’s part of their charting study toolbox.

>Pd060430daily

 

I think one of the most important features that I see in channeling is that it helps us to know where we stand. If you look at this 6 month PD daily chart, you can determine several things at a glance:

  • First, that the main trend is up,
  • Second, that potentially this up leg will either end with a test of the previous high at $91.74 or touching the upper band at $96 + -,
  • If not, the trend is very strong.

In hindsight, it is easy to visualize that a $78 buy stop order would’ve been the ideal entry level for a trade in this up leg.

I also use the Trend Channel with other time frames, hourly, 15 mins and 3 mins; they all add to our understanding of what is going on.