Basic Concepts
- Trendline:
- A high trendline connects two or more peaks in the price series with no price between the first peak and the last peak breaking (going higher than) the trendline. A low trendline connects two or more low points in the price series with no price between the first low and the last low
breaking (going lower than) the low trendline. - Channel:
- A channel refers to a high trendline and a low trendline that are reasonably well collimated (close to parallel). The important feature of a channel is that the high and the low trendlines enclose price action for a given period of time.
In technical analysis, the definition of a rising trend is a period of time when the central tendency (the general direction) of the price action is up. This is often expressed as a period of higher highs and higher lows. Since a high trendline connects the significant highs and a low trendline connects the significant lows, then if you see a rising channel — i.e., a channel where the high trendline and the low trendline are both rising then you have found a rising trend.
One of the things our software does is search for rising channels. Rising channels are important because they significantly shift the odds in your favor. For example, lets say you have found a system that's very reliable, but it doesn't get you into a trade until a rally is half over and it doesn't get you out of a trade until the following decline is half over. The chart that follows shows the results of that system if the trend is flat.
If you buy at A, sell at B, buy again at C, and sell at D, you don't make any money because you are buying and selling at $150. All you are doing is making your broker happy since he makes money every time you buy and sell.
Now lets look at exactly the same system if the trend is rising:
You buy at A for $165 and sell at B for $190. Then you buy at C for about $205 and sell at D for $240. Even though the system is the same, you are making money because you are using the system under favorable market conditions. Our system gets you in and out far sooner in the cycle, but it still benefits from being used in a rising trend.