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All,
Before I discuss trend lines and channels as I promised, I want
to say a few words about the type of charts. Most people use H,L,C
bar charts for their charting. I don't, I use CandleVolume charts. I
always thought that having an arbitrary time period such as a day for
the x axis of a price time chart didn't make a lot of sense. When
Arm's wrote his EquiVolume book back in the 60s he made his x axis a
function of volume per unit time. This made a lot of intuitive sense
to me. The more volume in a given trading period, the wider the bar.
I've been using volume based charts every since then. When MetaStock
started using CandleVolume charts I switched to them. In CandleVolume
charts, the width of the candle is a function of volume, just like
Arm's equiVolume charts. I thought the additional information on the
candlestick should be valuable, although I'll be the first to admit
that I have never gotten any consistent results based on only
CandleStick patterns. I keep using CandleVolume charts because I like
the way they look and maybe, just maybe, I'll run across that magic
pattern some day <G>.
The reason I go into this, is that if you are using trend lines
or channels for signals, you will get different signals and different
results with H,L,C bar charts and CandleVolume charts. I'm very
comfortable using CandleVolume charts and happen to think that they
give better results than H,L,C bar charts. Having said that, I also
have to say that I have absolutely no proof of that. I've never done
a systematic study and haven't seen any done by others. But I feel
they are better and it's important to go with what you believe <G>.
For constructing trend lines I prefer Trader Vic's methodology.
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 and extend the line to the right. It's
important that you pick the right low to draw the line to. It must be
before the highest high in the timeframe and it must be the one low
that will allow you to draw a line that doesn't intersect any data
before the highest high. A down trend line is just the mirror image.
You start with the highest high in the timeframe being considered.
Draw a line to another high before the lowest low such that the line
does not pass through any data and extend the line to the right. To
construct the trend channel, draw a parallel line on the other side of
the data that only touches the data at the extreme point. That is it
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.
I use these Trader Vic type channels for my long (years) and
intermediate term (few months to over a year) channels. I use the
channels to get my buy signals and set my stops. If they are wide
enough, I may even use them for setting my targets, but that will be
the subject of a later post. Right now I want to just concentrate on
how I construct my trend channels. There is a problem with using
Trader Vic type channels for Short term (days to few months) channels.
That problem is that you will tend to get too many false breakout
signals for a data set that hasn't gone through one or two significant
corrections. To try to overcome this problem for short term channels,
I use the Standard Deviation channels built into MS6.5. The problem
with this type of channel is to know where to start and end your
channel. I did not want this to be arbritary, so after some
experimenting, I decided on the following. For up trend channels, I
start my channel immediately to the left of the lowest low in the
timeframe being considered just like Trader Vic. Then I end my
channel immediately to the right of the highest high in the time frame
being considered. Initially, 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 new 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.
That's it. That's the way I construct my trend channels so there
isn't any arbitrary settings. Any questions or suggestions?
JimG
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