Trend Channels
Trend channels are used to track the momentum of a trend, with
- peaks (or highs) frequently respecting the upper trend channel; and
- troughs (or lows) respecting the lower trend channel.
There are several different trend channel options on the Draw menu:
Auto-Fit Trend Channel
Automatically fits a trendline above or below the selected data (depending on where you drag the channel line) and draws a parallel line through the opposite extreme point.
Linear Regression Trend Channel
Automatically fits a linear regression line to the selected data and draws parallel lines through the extreme points on each side of the linear regression line.
Raff Regression Channel
Automatically fits a linear regression line to the selected data, draws a parallel line through the most extreme point from the linear regression line, then draws a second parallel line at equal distance on the opposite side of the linear regression line.
Standard Deviation Channel
Automatically fits a linear regression line to the selected data and draws parallel lines at a set number of standard deviations from the linear regression line. The example below is fitted at 2 standard deviations around the linear regression line
Drawing An Auto-Fit Trend Channel
-
Select Trend Channel from the Draw menu or click
on the Draw toolbar.
-
Click your mouse on the chart and drag it below the selected data in an up-trend
or above the selected data in a down-trend.
- Select Closing Price for long-term charts or Highs and Lows for short-term.
Drawing A Linear Regression Or Raff Regression Channel
Follow the same sequence as for Auto-Fit Trend Channels, except:
- Click
or 
on the Draw toolbar; and - It makes no difference whether you drag your mouse above or below the selected data.
Drawing A Standard Deviation Channel
Follow the same procedure as for Linear Regression Channels, except:
- Click
on the Draw toolbar; and - You will be prompted for the number of standard deviations.
Editing A Trend Channel
Individual lines of the trend channel can be auto-extended, edited or deleted in the same (right-click) fashion as a normal trendline.
Trend Channels: Evaluation
I find Standard Deviation Channels the most useful trend channel option. They can be set to exclude the extreme data points that often result in other trend channels being drawn too wide.
I use 2 standard deviations, which encloses roughly 95% of the selected data; 3 standard deviations encloses about 99% of the selected data but closely resembles the Raff Regression Channel.
Two sets of standard deviation channels are drawn on the above chart:
- 2 standard deviations (dark)
- 3 standard deviations (light)
You can see that the dark trend channels (at 2 standard deviations) more accurately represent trend action for the period and offers better signals.
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