A market follows its primary trend in a zigzag form. The trend direction is easy to see; the real challenge lies in identifying the minor trends. Price channels are a technique used to discover the outer boundaries of the market’s action concerning a trend. One simple method is to draw a trendline along the lows and a parallel line along the highs and project both lines forward. A more scientific method is the regression channel, which was introduced by Gilbert Raff in the October 1991 STOCKS & COMMODITIES. The regression channel defines the primary trend by using a linear regression line with a lookback period selected by the user. Next, parallel channel lines are plotted above and below the extreme price excursion, thus defining the outer parallel channel lines. According to Raff, this technique offers a good deal of information regarding the technical picture. PREDICTIVE ACTION In his book, Trading The Regression Channel, Gilbert Raff states that if we have drawn our channel correctly, … [W]e’ll see a remarkable process unfolding. The Regression Channel Top will be the precise point at which the high days in a trend hit resistance and turn down, and the low days will find support at the Regression Channel Bottom and turn up. Finally, a day will arrive when price exceeds the Regression Channel Range and the trend is over. Later, he states: The most powerful single requirement of a Regression Channel is that it exhibits predictive action. This means that it encompasses turns in the market that have already occurred and that it continues to do so in the future. Clearly, Raff believes that the most important trait of the regression channel is that it can predict future price movement. Based on personal experience, the resistance, support and attraction characteristics of a properly drawn channel can provide strong price movement clues that can help you decide what to do in your trading. However, it is crucial to develop the ability to correctly place regression channels so they properly define the market consensus and provide the neces-sary predictive action. |
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