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.
