Friday, October 12, 2012

Channel Theory IV - Tradable Channels

One way to characterize channel activity is to define them in terms of volatility. While normal clean trends have high inter-swing volatility and low inter-bar volatility, channels have the reverse. From a visual perspective, this means that every swing in a channel goes only a few ticks further than the prior swing (b36,40) but the pullbacks are deep enough to possibly stop you out. This means that any arbitrary entry in a channel is at a higher risk to take out a fixed stop even if it respects a bar stop.

The risk of stop out is inversely proportional to the slope of the channel and directly proportional to the bar size and overlap. For example, you are at a higher risk of being stopped out of  a short in the channel down from b33 than in a short in a channel down from b10.

The probability of profit is higher if there were recent large trend bars. Any large trend bars (b12) that follows a channel activity (b7-11) show energy and interest and the chances of a failure of such a trend bar (b17) or a continuation (b18) leading to a trend breakout are high.

Channel activity in the absence of large bars is highly susceptible to random drifts and reversals (b27-79) and chances of a break into a large trend are lower.

In summary, tradable channels are steeper, have recent large trend bars and have smaller bars compared to their swings.


  1. Cad;
    sorry for the grammar;
    Thank you very much for your lessons. I have two questions about the current lessons.
    Please do the following questions for clarification. Why do you placed the bar 18 mark 1cbo? Through high bars 7 and 10, you drew down trend line. Bar18 bounced off the trend line. If I understand correctly - there was no breaking of the trend line. What caused the designation of bar 18 as 1cbo? I see there just A2 Short (after failed H2). 1cbo I can see in this chart - for example, bar 49 (with trend line: bars - 32,37,42,47 – true channel) or (bars: 66,70,76 – true channel) with bar78 as 1cbo.
    The second question: in the Channel Theory I - Defining channels you describe several types of channels. For example, Trend channel (TC). Then, the first attempt to trend – bars 4-7 can be treated as TC, and pullback bars 8-9 as 1cbo (which failed as a second attempt go higher – bar 10)? Similarly, channel bars 28-32 (TC). Are these four bear trend bars 33-36 in real time (pullback) can be treated as 1cbo, which then failed and turned into another channel? Does it make sense what I wrote?

    Jarek, Poland

    1. As I've mentioned in the earlier posts, a channel will often test the channel TL in addition to the TL from HOD, i.e. from b10. But you may be right, this is not a clear example.

      A TC is made of small trend bars, typically smaller than 2 points. Most bars in a TC have one or two shaved ends or have 1t tails. When bars have large tails, they are not TC.

      Easy way to remember: TC is a Channel (C) made of trend (T) bars.