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Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement by Richard Lehman

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Chapter 11. Reading Between the Lines

Extensive research in what may be termed human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern.[72]

Ralph N. Elliott

The old notion of a trend channel is little more than that of an isolated formation one could attempt to exploit for a reasonably short-term trade. A technician who spotted one early enough in its formation would attempt to profit by initiating the trade as early as possible in the formation of the channel and exiting the trade when the channel finally "broke" (the point at which the underlying stock or index trades outside of a boundary line in the opposite direction of the trend). There was no way to evaluate the strength of the channel (i.e., its sustainability) or to establish any idea about what might happen following a break. An investor could simply ride the trend for however long it lasted and hope that it continued long enough to make a profit.

Trend channel analysis (TCA) expands this notion immeasurably, transforming trend channels from an occasional one-time exercise in pattern recognition to a continual and dynamic mechanism for evaluating and interpreting the movements of the underlying instrument. A chartist using TCA can follow a particular index on a continual basis, projecting the likely future path of a channel ...

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