trading channels

There's no right way to draw it.
Many ways will work. This is, again, because prices are random.

 

If prices were random you wouldn't have channels or trends of any kind.

 

lol

 

lol

 

lol

 

Why not?
It is precisely because returns are outcome of random variables that we see trends and channels.

 

Agree.

 

You can generate a random walk with a coin toss.

The difference between a random walk and the market is that over time, supply and demand isn't determined by a coin toss. People factor in past performance, and anticipate future price direction. A coin doesn't care about any of that, it has no conciousness.

Trends and patterns are self-fulfilling. People see them and try and profit from them, which perpetuates it to an extent.

The market isn't just some mathematical computer generated noise (although that's how it seems sometimes), there is people behind this.

 

Can you explain this in math terms?

 

I will give it a try.

Ascending and descending trading channels gives us a great set ups to trade, because for itself we have a stop loss defined (maximum loss to afford), and a reliable price target to set the take profit. Practically, once the price touches the bottom, or floor of the channel, there are good chances that, once confirmed the reversion, will try to reach the top or roof of that channel.

The trading channels main trend line is define by linear regression. It takes at least two points to draw the main trend line. This line sets the tone for the trend and the slope. For a bullish price channel, the main trend line extends up and at least two reaction lows are required to draw it.

The main trend line math comes from linear regression that is first taught to students in high school algebra. Students use it to predict the future from past data. The future from the trader’s point of view is the main trend line. With traders it commonly used to determine when prices are overextended. Linear regression is used to explain and/or predict. The general form is: Y = a + bX + u Where Y is the variable that we are trying to predict, X is the variable that we are using to predict Y, a is the intercept, b is the slope, and u is the regression residual. This linear regression equation is calculated by drawing tool from the two points that the trader selects next to price on the screen. Google algebra linear regression.

A Trading Channels is a price movement with a main trend line drawn threw it that is bound by an upper and lower trend lines. The upper trend line marks resistance and the lower trend line marks support. Price channels with negative slopes are considered bearish and those with positive slopes bullish. The upper and lower trend lines are calculated using a statistical distance called standard deviation from the main trend line. Standard deviation is a form of measure of the statistical odds that price has deviated from the main trend line. Google statistics standard deviation.