Thanks for the reply. Did Darvas use channels or just rote memory? Why do channels work...what is the logic/science behind them? I primarily use channels on high quality stocks. 90% of the time...the LTL gets pushed out for a VE rather than a ftt.
Because the inside-line, the bottom trend-line (regardless of the angle) is doing all the work. If upwards channel, the channel line that is the inside-line is creating the advancement/force/pressure (not the outside-line). Same with the opposite direction. Triangles are channels in a way, both lines could be considered inside-lines, both lines angle and sustain the move. However, incredible power builds on these opposing pressures, and the triangle channel pops. (In a 'typical'/equal channel there is only one pressure line.)
I'll break this response up into parts. Darvas used space, shapes and change of shapes. The most concise answer are his comments on his recovery from a NYC experience. (mid chapter Nine). He told his brokers to just do as they were told. He only wanted one input. A daily telegram. This is how skilled trading begins. Only one set of info is used. Darvas was "discovered". He named what he did "Techno-Fundamentalist Theory". He had degrees in economics and scoiology from U of B (Budapest). His famous quote below wraps the whole package very elegantly and neatly: " I just jog along with the trend trailing my stop lossinsurance behind me. there are no good or bad stocks, there are only rising and falling stocks. I can become a diagnostician but I can never become a prophet." His most noted profession was dancing with a partne in clubs all over the world. Making 2 mill as an amateur in 18 months in those times (1955-60) was unequaled in the public eye. The daily process was to read the financial page of the paper, get the telegram data set and use a sheet of paper to study and analyze price and volume. He repeated what he did over and over. So lets turn to the task of using data to construct a method of making money all of the time. Be a dancer who studied people and money by using facts. In a nut shell what Darvas did (chapter Four) is a parallel of PVT and picking the PVT Universe. So lets convert a box to a channel.
High quality stocks go through stages. One stage leads to another. A channel exists for each stage. The rule is to move channel points ahead when the VE occurs. As staging ends, then the FTT occurs. So lets consider providing the solution as to why and how channels work. Channels are just tools for taking the offer of trends. Ammo posted a tool he uses on a semi-logarithmic chart. He shows an envelope of the market and from that he finds the MLR line (Blue dashed) and uses the MLR on any semi logarithmic price scale. Setting up a channel properly is where the channel gets its immense power as a tool in technical trading. The basis of the channel's points comes from market granularity which is the cause of the interlocking of fractals. The geometry of markets is "built" from the smallest pieces to the largest pieces. for convenience the trader "chooses" where he wishes to operate. The choice is a compromise between the mind's speed and the market's shape changing speed. So in the compromise it is not possible to do anything arbitrary. If a person does, then it is not possible to use criteria, rules, functions or any other rational based efforts. The first way to get into channels is to contruct them for trading rather than investing. Investing is what the financial industry does. Trading is what experts do to take the full offer of the market. Channels enable a person to take the full offer of the market. Start each channel at the beginning of a trend. A trend segment is an opportunity to take the full offer of the market. Channels, therefore, use trendlines which also begin at the beginning of a trend. This is an interruption of the theme. So I type in color to make a point before moving ahead. As was ponted out channels work and channels don't work. So it is important to know about this factor all of the time as a trend is building. To take into account "working" and "not working", an expert has to do "classification" efforts. This is fun effort and it is very helpful for becoming well versed. Darvas did this as part of his trading. For Darvas, a stock could not make his list if it misbehaved. In modern times with computers and lookup tables, we have an alternative. Lets look at the two classes of trends where the trends do NOT develop fully; they are: the one part trend (no turns) and the trend that does make the first turn (nondominant) and then moves as a dominant after that (a one turn trend with a switch of dominance). As you see people speak of trends NOT working but they do not define the "NOT working" inany manner. They usually only define "working" trends in define ways. th doing this they actually do not complete the assignment either. Back to work on the channel. Lets call this work a job where we have a normal channel for taking the market's offer. A normal channel begins and at the end of overlap becomes a dominant price move in the new channel direction. At point 2 of the channel a retrace begins in the non dominant direction. All of this is observable and the trader knows the difference between a retrace and a reversal. There was no reversal. Darvas mesured this by observing volume as he continued to hold the stock. The quick check for beginners, etc. , is to just observe that the point 2 is OUTSIDE of the prior channel container. If it is not, then the old channel has taken on a new kind of function. Another digression to explain this "old chanel taking on a new function" concept. In trend trading it is wise to know the advent of the beginning of trend "drift". Trend drift is different than just lateral movement and there are neat tools for differentiating which is which. Since this is all part of trading, it has to be learned. The first step is to recognize the existance of something and then later assign a name and define it uniquely. When point two is outside the prior channel and price is moving forward, you observe that you are giving back some unbooked profits in weak channels or you are stalled in making money in stronger markets. So be it. at least you are aware that the channel is a good tool and you are approaching the events where it becomes most powerful. The non dominant volume ends its decline and you see a spike on the price bar and then you see the Doji and, if your color coding is sensible the dominant color returns to this bar. you see that the bar extreme is point 3 of the channel and, naturally you draw in the channel RTL and LTL. You HAVE a channel. Please extend the RTL and LTL foward into the future. At this point in time you are a trader and your main assumption is this: The MARKET VOLATILTY is CONSTANT. The purpose of a channnel is to define the interior space of the market's constant volatility. Making money all comes down to knowing you know the market's volatility. You cannot get a measure of the dependent variable (price) IF the maket volatility drops below normal. Price Action trading does not observe this phenomena. So how to make money comes down to how to use a channel once it has formed. We also now know what is gong on if and when a channel cannot be formed (see first colro statement). We also know there is a condition whereby a trend begins to drift. channels are powrful tools for know what is going on all the time. The condition, circumstance and situation for ending a channel is now in the picture. Print and highlight these factors mentioned above. What is upcoming is the most important aspect of a channel. It is this. The end of a channel tells you where to begin a new channel. How this ending works is why a channel is used.
Lets end the channel and come back a study the more sophisticated aspects later. As a last dominant move takes place after point 3, new profits are being assembled. and not yet realized by locking them in with a reversal trade. how is dominant progress made? The minority controls this. you observe about 10 to 12 leading indicators of price and each display component offers you more and more factual information on how the market is working on your behalf. The leading indicators are just another tool set you use. A beginner can see how volume works to change price. On the DOM, the minority is eaten away tick after tick and the trend value collects more and more profits. To take a position costs more and more in a trend as long as there is a minority to allow the trade. At some equilibrium, there is no minority and the volume of transactions is able to build up at a given price. The people wanting to take a position always have a supply of others who wish to leave their positions. As time passes the sloping line ahead (LTL) in the dominant direction is no longer attainable or approachable. The minority became a too large majority. Thus the sentiment of the market is making a change. This change of sentiment is the End of the trend. I refe to it in channel terms. It is a failure to traverse (FTT). the increasing volume cannot no longer drive the price to a greater extreme. So point 1 of the next channel is noted. This is where the new RTL begins and it has a slope that will reflect the opposite sentiment of the market.
In discussing channels as a powerful tool, a lot of other signal generators come into being. I use the four types of trends mentioned. Two types address the incomplete types of trends. The other two provide for the normal trend a channel makes and also the drifting trend a channel can contain. The simplest differentiator of the four tend types are the types of price turns. Only three types of turns exist. The VE you mentioned is a nice measure. You hold as the volatility expands and, simultaneously, you reset the channel points to extend the trend in its new regime. I decided to extend the channel concept to prevent losses while trading. That is how the BookMark and the rtl came to denote some turns in markets where incomplete trends occur. Since, in trends, the price turns define the channels, I decided to concentrate on having a complete set of market pieces with which to define the trend turns and the trend types. It turned out to be a collection of look up tables. By defining mathematically price and volume pieces, I could, in turn, define trends and the turns which make up the four types of trends. My final, arrangement of the information was to make pair of turns that show the end of a trend one turn before tha actual end. This just meant there was much lower risk as the applied capital became close to the limit of market capacity. Fortunately, markets continue to increase capacity. I posted all the look up tables that contain the associated maths. In terms of Darvas's performance, his 18 months is reduced to one trend hold and reversal. This is quite an advantage over the pre-computer days. And the market info works exactly the same way today as it did back then.
The logic behind channels is defined and precise. You must be able to define each turn mathematically in terms of the independent variable. The independent variable measures are all gated or killed by the character of price at that event. Channels are defined by turns and, thus trends, in channels, have beginnings, forward movement and endings. Channels may be incomplete or complete. what defines this phenomena is the turns. The turns are considered relative to one another for the express purpose of sorting out one kind of turn type that defines the ends of trends. I call it the 'c turn". The "c turn" is a turn whereby the sentiment shifts from one dominant to the opposite dominant. There are organizations today that do discover those that toil on various types of things. What is the most fun is being on the boards of such outfits. You get to fund new people and you get to serve with great people who desire to choose to help others. Now, in these really modern times it takes two portals to keep the show rolling. One for problem solvers and one for money suppliers. The internet seems to be the locus for setting up these important portals. It will be nice to see if ET can become a source of traders once again.
Active traders use tools that can be used in less than 3-seconds. You just wrote more than 3-seconds worth of blah, blah. You think traders here will actually read it? Can you please re-write it in 3 sentences?
Its what's known in the trade as "carving the sentences". Also known as "taking the full offer of the waffle "