Trading Basics: Evolution of a Trader

VISUAL TIPS

The following five tips complete the chapter. These tips are visual ones that will help you decide when to take action and when not to. They help predict future price behavior, including my favorite, the triangle apex turn.

41. Drawing Three-Point Channels

Drawing three-point channels is a technique that is not well known, I think, but it has its uses. I show two methods for drawing them in Figure 5.15.

Figure 5.15 A three-point channel points the way higher in May, and Andrews pitchfork forms a channel in November.

Imagine that you have three major turning points, such as those shown at A, B, and C. Draw a trendline connecting valleys A and C and extend that into the future (D). Draw a line parallel to the AC line starting at B. Notice that price reverses near E, which is near the top channel line. The lines extending from ABC form a three-point channel.

Draw three-point channels after a downward price trend to give you an idea of how price may move in the future. Unfortunately, it does not work very well. The technique depends on the slope of the AC line and how far price has climbed above that line, to B.

If the slope is 30 to 45 degrees, then the line may hug price well (or at least follow it upward). Price seems to climb at about that angle. Lines steeper than that are probably too optimistic to be real.

If the stock does not hug the top trendline at E, then redraw ...