Are Two Channels
Better Than One?
by Stéphane Reverre
This author tested two channels based on Bollinger Bands
around a standard moving average and an application of the
capital asset pricing model, and discovered that a combination of the two performs better than the two separately.
Traditional wisdom states that
"The trend is your friend," and
experienced traders know that
it is far wiser to embark, even
late, on an established trend
than to play a correction against
it. Many indicators have been
designed to specifically predict a fledgling trend or an imminent correction, and out of
these, channels have had some
success. The channel family of indicators tries to glean
pertinent information from the market by setting specified
boundaries around the current movements of a stock, and it is
unlikely that the stock will move out of those boundaries
unless an unforeseen event occurs.
I tested two channels based on Bollinger Bands around a
technical indicator: a standard moving average and an application of the capital asset pricing model (CAPM). I discovered
that a combination of the two performs qualitatively better
than the two separately.