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The Traders Wheel
by Alan Farley

Parallel Price Channels

Parallel price channels extend the reach of classic technical analysis. When located, these unique formations reveal detailed information on a stock’s trend. Channel traders have a great advantage over their competition since few TA books examine them in detail. PPCs exist both in geometric and arithmetic price displays, but never both at the same time. They also reveal fibonacci relationships that enable visual traders to examine predictive behavior without using a calculator.

In our Random Walk world, how can four (or more) highs and lows connect so easily into parallel lines? By themselves, they present a strong argument for TA’s power in price prediction. Unfortunately, clean trendlines don’t print often in today’s markets. Insiders know exactly where these lines set up and repeatedly violate them to trigger volume. But those same players never see price channels, allowing sharp traders to execute positions below the radar.

While difficult to locate, PPCs occur more frequently than simple trendlines. They expand the use of trendlines by allowing 2 high or low points to define underlying order. However, these must match (in most cases) at least 2 points at the opposite extension of the underlying trend. For some reason, PPCs appear in multiple time frames of the same market. This complex fibonacci structure stands as one of the most fascinating observations in all technical analysis.

These lines also produce a closely related phenomenon called channel harmonics. PPCs often print multiple interim lines of parallel price activity between two extreme parallel points. When these harmonic lines can be identified, channels can be confirmed with less than 2 extreme points at each terminus.

Strategies for channel trading closely follow trendline and support/resistance concepts. Violation of any line raises the odds price will continue to the next parallel support level. Multiple time frame PPCs have a great advantage over trendlines. A complex trading method, such as Elder's Triple Screen, can easily be applied when they appear.

Alternatively, choose execution points based on the time frame persistence of the channels. The longer the formations exist, the more likely they will provide support or resistance for your trade. Always try to locate other key price levels to cross-verify PPC extremes. When moving averages, Bollinger Bands or Fibonacci retracements cross parallels, risk decreases and potential reward increases.

team991.gif (6686 bytes)
TEAM price action from 1990 to 1996 finally confirmed the existence of a parallel channel. Channels often take years to develop and can persist even longer. Due to the wide range of price movement over long periods of time, monthly and weekly PPCs are much easier to locate using geometric scale than arithmetic.
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As TEAM completed its multi-year PPC, it concurrently printed channels in several other time frames. Using all the support/resistance information from these complex formations provided detailed insight on price movement, down to very short time periods.

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC