Trading with Charts for Absolute Return

TREND CHANNELS

For most chartists, trend channels are a mere variation of the trend line technique. Therefore this discussion will begin with a brief description of the mainstream understanding of trend channels by most chartists, followed by modifications made to enhance the general application of trend channels as charting tools to generate valid and profitable trading signals.

Mainstream Understanding of Trend Channels

The drawing of trend channels on charts is simple in a narrow basic perspective.

In an uptrend, the trend line is drawn between the first two consecutive higher valleys. In the sample chart shown in Figure 4.15, the first two consecutive higher valleys are marked valley 1 and valley 3. Then a parallel line to this trend line is drawn through peak 2. If the prices move from valley 3 up to the upper trend line and peak 4 is formed, a trend channel is established.

FIGURE 4.15 Trend Channel in an Uptrend

Source: www.Fibotrader.com, 2010.

Prices have a strong tendency to establish trend channels. Many traders take advantage of this and establish a long position if valley 3 is established. The stop-loss is placed below valley 3 and the profit target is projected when the upper trend line is reached.

The opposite holds true for a downtrend market movement. In a downtrend, the trend line is drawn between the first two consecutive lower peaks. To illustrate this, peaks ...