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Lian,
I'll copy a previous post on channels below.
Jim
Trend Channels
I've come to depend more and more on trend channels as my primary
technical analysis tool. The theory of trend channel investing is
simple. First you have to construct the trend channel. After that is
done the rest is easy. For up trend channels you open a long position
right after a stock bounces off the bottom of a channel and close the
position when it hits the top of a channel. Vice versa for down trend
channels. I treat horizontal channels like up trend channels for
trading purposes.
Of course, I expand on this simple methodology slightly <G>. I
like to open a position in the direction of the long term trend when
an intermediate term trend channel is broken. After the new short
term trend has formed, there are additional entry points every time
the stock bounces off the bottom of the new short term trend. Using a
new short term up trend channel for example, I always set stops at xx
3/4 with xx being the whole number just under the short term up trend
channel. I set my target based on either the old high before the
intermediate term trend reversed or just under the top of the long
term up trend channel. When the stock gets near the top of the short
term up trend channel I'll hedge the position by selling near term
just in the money covered calls. I'll buy the calls back when/if the
stock drops back to mid channel. If it doesn't drop back, I'll just
let the position be called . Again short positions are just the
mirror image except that I don't hedge with puts.
The trick then is how to construct the trend channels. For short
term up trend channels I use the Standard Deviation Channel built into
MetaStock. I start just to the left of the lowest low in the data
being considered and end just to the right of the highest high in the
time frame. Then I set the deviation at 2 and extend the channel to
the right. Anytime a new high is hit, I'll drag the right end of the
channel just to the right of that high. As soon as I get a decent
reaction in the stock data, I'll check to see if I should change the
deviation. I'll use 1, 1.3, 1.5, 1.8, or 2 for the deviation, using
the lowest number that will bound all the data between the end points
without intersecting any. After a few months with at least two good
reactions, I switch to Trader Vic type trend lines which I like
better.
For a Trader Vic up trend line, start with the lowest low in the
timeframe being considered. Draw a line to a low before the highest
high in the time frame such that the line doesn't pass through any
data. It's important that you don't draw to a low past the highest
high in the timeframe. A down trend line is just the mirror image.
To construct the up trend channel, extend the line to the right, then
draw a parallel line through the most extreme high in the time frame
such that the line doesn't intersect any other data points. This is
easy with MetaStock. You can hold the CTRL key down, then hold the
left mouse key down once you are on the original line and drag a
parallel line to where ever you want it. You can do the down trend
channels in a similar manner. Horizontal channels are the easiest.
Just drop a horizontal line on the highest high and lowest low in the
time frame. My final touch is to code the short term channels blue
and use a dashed line, intermediate term red-dashed, long term
magenta-dashed. For my purposes, short term is up to a few months,
intermediate term a few months to over a year, and long term a few
years.
That's all there is to it <G>.
Jim
-----Original Message-----
From: Lian PL <lianpl@xxxxxxxxxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Date: Thursday, June 18, 1998 7:17 AM
Subject: Bollinger Bands and trading channels
>I should be pleased to hear from anyone how bollinger bands or
channels
>can be used in a proper way for taking trading postions.
>thank you in advance.
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