The Hindu Business Line : Trader's Corner

We have discussed the relevance of trend in technical analysis in many of our previous columns. While the trend helps us to identify the direction in which the stock is moving, channelling the trend would tell us where the stock is positioned in relation to the prevalent trend.

To construct the more commonly used trend channel, begin by drawing a trend line, by connecting the troughs in an up trend and by connecting the peaks in a down trend. Next, draw a line parallel to the trend line by joining the troughs in a down-trend and connecting the peaks in an up-trend.

There are other trend channels that are constructed using statistical tools. Of these, Raff’s regression channel is pretty handy for traders. To construct this channel, a linear regression line is drawn through a set of data for a specific time-period. Then equi-distant parallel lines are drawn on either side of this line in such a way that they touch the highest peak or the lowest trough.

Trend channels can be incorporated in trading in many ways. They primarily help in identifying the next support and resistance level in a chart. The upper boundary of the trend channel would be the area where an up-move can encounter resistance. Shorting would be a good idea as the price reverses from these lines. Similarly, buying opportunities would be available as the price bounces off the lower boundary of an up-trend channel.

It would of course do to corroborate these buy and sell signals with other technical tools such as Japanese candle sticks, momentum indicators etc. To elucidate, if a stock reverses from the lower boundary of an up-trend channel accompanied by a hammer pattern in the candlestick chart and buy signal in the stochastics, it would be the right juncture to initiate a buy. Trend channels can be extrapolated and thus used to project the targets for a particular move as well. — Lokeshwar ri S.K.

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