The slanted channel notion implies the trend direction detection. The reader should keep in mind that ?the trend is our friend?. That is, if one clearly sees the trend direction, one works along it.
For instance, let us examine a chart from ?Technical analysis of future markets? by J. Murphy. (For view the picture see notes in end of article)
Besides, one should pay attention to a chart from the book written by J. Swagger (?Technical analysis. Complete course?).
As these plots demonstrate, in both the cases the slanted channel is directed downwards. Thus, it is the ?bear? trend. Under these conditions
? any deal made on ?sell? must bring profit
? the higher is the deal-rate, the higher will be the profit that a trader can gain at Forex.
It is so easy, isn?t it?
However, why do at least 19 of 20 traders keep on losing their game at Forex?
To answer this question, we must in detail study the following aspects of this problem:
1. One must understand techniques of charting (plotting) the slanted channels in works by classicists of Forex.
2. While working with slanted channels, one must see points of opening and closing deals ? in accordance with the determination of such points in the classical literature concerning Forex.
3. One must find out the unsettled (unsolved) contradictions that the classical literature on Forex contains. Such contradictions inevitably result in losses when traders open/close deals according to these techniques at Forex.
4. One must find an optimal solution to such problems, unsolved yet.
5. Further we will introduce the optimized version into Masterforex-V Trading System. That is, by combining different approaches, Masterforex-V Trading System will help us to detect optimal points where deals should be opened and closed.
Comments. In Masterforex-V Trading System, points of opening and closing deals are defined in the following way. These are the intersections of signals from slanted channels with Fibonacci levels and moving averages. Masterfoex-V Trading System also studies techniques of the work with ally pairs and zigzag-fractals in various time frames (TF). Besides, in this system, levels and sublevels of resistance and support are also taken into account. The currency pair movement type is also considered. That is, it can be a trend or a flat. In Masterforex-V Trading System, other traders? working instruments can be used (Elliot?s waves, etc.).
Generally speaking, one can single out the following techniques of the slanted channel charting (plotting).
? A trader can work with a single slanted line (the lowest one under the condition of an ascending trend or the upper one when the trend is descending).
? Otherwise, one can work with two slanted lines (the lowest and the upper ones) - they correspond to the resistance and support, respectively (according to T. Hartley).
? There is another approach, developed by Barishpoltz. The two lines of moving slanted channels are optimized. Their tilt angle becomes changed as soon as a currency breaks through one of the levels of a given channel.
? There also exists the slanted channel technique, elaborated by T. DeMark. This author has introduced the notions of TD-points and TD-lines.
? J. Swagger has developed his own technique of the slanted channel plotting. It is based on detecting the tendency with the help of maximums and minimums.
I. J. Murphy?s technique of the slanted-channel plotting on the basis of a single slanted line
This technique of using slanted channels for determining the trend type is an element of the basic course in all manuals of Forex.
? The channel slanted upwards is plotted through minimum points. It is a level of support. Making a start from it, the ?bull? trend is going on.
? The channel slanted downwards is plotted through maximum points. It is a level of resistance. Making a start from it, the ?bear? trend is going on.
The charts from ?Technical analysis of future markets: the theory and practice? by J. Murphy can serve as the illustrative examples. Below each of the two charts the comments given by J. Murphy are submitted.
Chart 4.6a. An example of the upward-directed trend line. (For view the picture see notes in end of article)
(Here and below all over this chapter the chart numeration is preserved as it is given in the originals under quotation)
The trend line is drawn below the sequence of ascending minimums. First, the trend pilot line may be charted via two local minimums the second one being located higher with respect to the first one (e.g., points ##1 and 3). However, only a third point (#5) can confirm that the trend line is true.
Char 4.6b. The downward-directed trend line. (For view the picture see notes in end of article)
The downward-directed trend line is drawn above the sequence of descending maximums. The pilot trend line may be charted via just two local maximums (e.g., points ##1 and 3). However, this line can be regarded as true only if a third point (#5) is included into consideration.
I.A. The clarity introduced into the slanted channel plotting technique by Neiman in his ?Trader?s small encyclopedia?
According to Neiman, the following features (signs) can be related to general characteristics of trend lines, figures and models.
? The signal arises only after the intersection of the level of resistance or support in the slanted channel. Before this moment the analysis is reduced to prognosticating the possibility of the price behavior (movement) within the framework of a given model.
? Conclusions concerning the forthcoming (immediate) development of the currency actual movement are the most reliable.
? Trend models can be divided into the following groups: confirming the trend, warning about the forthcoming reversal and working towards the general direction of the trend development. In the third case, conclusions concerning the trend further development are the most trustworthy.
? Dealing with any signal (even the most intensive one), it is advisable to detect supplementary signals of any type.
? It is useless to look for trends within short time intervals. If the trend lifetime is very short (<5 min), the profit can be too small ? negligibly small as compared with the possible losses. Under these conditions, the short trend can be directed against the long one (the longer trend is more intensive).
? Except straight lines, any smoothly-curved lines can be used - even geometrical figures (such as circles and ovals) do fit.
II. The technique of slanted channels according to T. DeMark
As distinct from Murphy?s slanted channels, T. DeMark has elaborated the technique of TD-points and TD-lines (local peaks of intra-day candles).
T. DeMark describes drawbacks of Murphy?s slanted channels. Issuing from there, T. DeMark has introduced TD-points and TD-lines for plotting slanted channels.
Often the notion of ?trend line? is interpreted ambiguously and illogically. However, the reader should keep in mind that among a great number of possible trend lines, just only one line is true. T. DeMark has succeeded in developing an effective technique of his own. It consists in choosing just two critical points for plotting the trend true line.
Chart 1.1. (For view the picture see notes in end of article)
The descending line of ?supply? depicts the gradual decrease in prices. Price peaks (maximums and minimums) are also descending step by step.
Chart 1. 2. (For view the picture see notes in end of article)
The gradual increase in prices is depicted in the ascending line of ?demand?. Price peaks (maximums and minimums) are also ascending step by step.
A direction of the movement in prices is determined by ?demand and supply?. If the demand exceeds the supply, prices increase. And v.v.: if the supply is higher than the demand, prices fall down. All economists accept these basic principles. Charts 1.1, 1.2 illustrate this approach. The descending line corresponds to ?supply?. The ascending line depicts ?demand?.
However, the difficulty consists in the choice of the special (particular) points, through which these straight lines pass (see Chart 1.3). As a rule, the analysts? approach to trend line plotting is rather subjective. The movement in prices is traditionally studied retrospectively ? from the past to the future (???). This is why in the chart axis the dates are written from the left to the right. Respectively, lines of the demand and supply are plotted from the left to the right. As one can intuitively sense (feel), it is incorrect. Really, the price movement at a given moment is much more important than movements in the market in the past. In other words, the trend standard lines must be plotted from the right to the left. In this case, the latest data on the state of the market occupy the right part of the graph. Firstly one can think it unusual. However, T. DeMark?s own experience and numerous observations confirm the expediency of this approach. One must not sacrifice logics and preciseness for the sake of simplicity.
Below one can see the generally-accepted procedure of plotting a large number of trend lines. Just one of them is regarded as true.
Chart 1.3. (For view the picture see notes in end of article)
The most important is to choose the two key-points among the multitude of all points. The trend true lines pass through these two points.
In addition, T. DeMark has mentioned that further he will prefer to use the daily charts and daily prices for grounding (illustrating) his analytical statements. However, these dependences are true in all other time frames. T. DeMark has explained the reasons of choosing exactly daily charts.
1. The daily information is the most accessible. In dozens of years analysts keep on working mainly with daily charts.
2. Working with daily charts, a trader must not continuously trace out the market intra-day behavior. The chosen regime of work reduces the risk of being trapped because of the prices frequent corrections ? as it is known, such corrections are the ?pest? of intra-day databases.
3. It is preferable to use market signals, based on the daily information. In this case, there increases the probability of making deals at a price, closest to the one given in the order.
Chart 1.4a. (For view the picture see notes in end of article)
At the encircled points the prices are the highest in the days, directly adjoined to the day in question. Supply price pivot points (TD-points of supply) serve as key-points because of the following reason. Due to the increase in the supply, prices cannot break through the level of resistance that passes through these key-points.
Already at the very beginning of his investigations, T. DeMark has come to the following conclusion. Supply price pivot points are detectable when the price maximum becomes registered. Other price values do not exceed this maximum on the eve of the day in question and the next day as well (see Charts 1.4a, b).
Naturally, to determine the demand price pivot points, one must use the inverse procedure. A price point is considered to be the demand price pivot point if the price minimum becomes registered. Prices do not fall down lower than this minimum value on the eve of the day in question and the next day as well (see Chat 1.5).
In fact, it looks quite logically. Such demand/supply price pivot points become formed at critical days ? i.e., they are reversal points in the trend development. If the supply exceeds the demand, prices fall down (see Charts 1.4a, b). If the demand exceeds the supply, prices increase (see Chart 1.5). As T. DeMark discovered these tendencies, he considered to have the right to name these points after his own initials (TD-points).
Charts 1.4a, 1.4b, respectively, depict these patterns. First, two maximum, subsequently descending TD-points are found out. Then the supply line is drawn through them (TD-line of supply). In Fig. 1.5, two price minimums, subsequently ascending TD-points are singled out. Then the demand line is drawn through them (TD-line of demand).
This approach is rather clear and simple, isn?t it? There cannot be any excuses that ?wrong? points were chosen. The procedure of choosing the points has become logical and objective. And what is more, this method is attractive as the price real dynamics is taken into account. In other words, any misbalance between the demand and supply indicates itself in the charts via the appearance of new TD points. As such points are appearing, the continuous correction of TD- lines is going on (see Chart 1.6). This graph illustrates the importance of determining the two last TD-points and plotting TD- lines through them.
Chart 1.4b. Supply price pivot points (TD-points of supply) form the level of resistance. At these points the prices are the highest on the days, directly adjoined to the day in question. These TD-points of supply are marked in this graph. (For view the picture see notes in end of article)
Chart 1.5. Demand price pivot points (TD-points of demand) belong to the level of support. The daily minimum price is registered. At these points the prices are the lowest on the days, directly adjoined to the day in question. The TD-points of demand are encircled in this graph. (For view the picture see notes in end of article)
Chart 1.6. (For view the picture see notes in end of article)
This graph depicts 4 potential TD-points of supply. The points A-B form the 1st line of supply. When a new TD-point of supply is formed (C-point), and a new line of supply can be plotted (B-C). Finally, after the formation of another point of supply (D-point), C-D line of supply can be charted. Clearly, this correlation between the supply and demand is varying continuously. Respectively, the line of demand (support), which depicts the market corresponding dynamics, keeps on changing as well.
3. Charting of slanted channels according to J. Swagger (see ?Technical analysis: the complete course?).
The descending tendency can be regarded as a sequence of maximums and minimums decreasing continuously (see Chart 3.3). This tendency preserves until the previous relative maximum is not broken.
The descending tendency is depicted by a sequence of continuously diminishing maximums and minimums (coffee December, 1992).
Here RH designates relative maximums RL denotes relative minimums.
Chart 3.10. The descending trend corridor (cocoa September, 1992). (For view the picture see notes in end of article)
Usually the following rules are applied to trend lines and corridors.
1. The fall in prices can be approaching the ascending trend line. Correspondingly, the rise in prices can be approaching the descending trend line. Often these conditions give a good opportunity for opening positions towards the principal (basic) tendency direction.
2. The ascending trend line breakout is a signal for opening a deal on ?sell? ? especially if this breakout is confirmed by the daily closing price.
3. The descending trend line breakout is a signal for opening a deal on ?buy?. As a rule, to confirm this breakout they fix the minimum rate of interest of the change in price or the minimum number. Otherwise, one can state the daily closings outside the trend line.
4. The lowest line of the descending trend and the upper line of the ascending trend corridor make the profit fixation potential zones for short-term traders.
IV. Optimization of T. DeMark?s slanted channel technique by D. Swagger, who makes use of ascending and descending tendencies
Swagger states that the definitions and terms introduced by him differ from those used by T. DeMark. However, the both approaches to the detection of trend lines coincide to the letter.
At the same time, Swagger considers that the technique submitted by him is clearer and more laconic than that of T. DeMark.
The relative minimum is the daily minimum, lower than any minimum in N days before the trading day and N days after it.
The descending trend line is the current line that connects the latest- and the previous relative maximums. The previous one must be higher than the latest. This condition is very important. It guarantees that the trend line that connects two relative maximums is really directed downward. In Chart 3.15, the descending trend line is depicted N=3.
The ascending trend line is the current line that connects the latest- and the previous relative minimums. The value of the previous minimum must be lower than that of the latest. In Chart 3.16, the ascending trend line is depicted. For determining the previous relative minimums, the parameter N=8 is used.
Chart 3.16. The ascending trend line - N=8 (SWISSI December, 1994) (For view the picture see notes in end of article)
Chart 3.17. A set (sequence) of ascending trend lines (sugar October, 1992). (For view the picture see notes in end of article)
Comments. The trend lines 1-5 are ascending sequentially. In detecting relative minimums (RL), N=10 is taken.
Thus, the procedure of trend line detection is based on finding out the latest- relative maximums and minimums. This approach permits us to continuously bring correction into trend lines when new relative maximums and minimums come into existence.
For instance, Chart 3.17 depicts a sequence of ascending trend lines. They are being plotted immediately after the appearance of new relative minimums (N=10). This is going on until the arrival of a signal for the trend reversal. In Chart 3.17, there are the three consequent closings at a level lower than the actual ascending trend line. It is a signal for the trend reversal. Analogously, Chart 3.18 depicts a sequence of descending trend lines. They are being plotted on the basis of relative maximums (N=8). Three consequent closings at a level beyond the actual trend line serve as the signal for the trend reversal.
Chart 3.19. A sequence of the descending trend lines (N=2). Exchequer Stock June, 1994. (For view the picture see notes in end of article)
Comments. The lines 1-12 of the consequently descending trend (N=2) serve for detecting relative maximums (RH).
Under different values of N, trend lines differ substantially. For instance, in Charts 3.19-3.21, various lines of the descending trend are depicted. They are obtained in the same chart under three different values of N. The lower is the value of N, the more frequent is the trend descending line correction - and the more sensitive is the trend line to the breakout. For instance, there is a dozen of trend lines, obtained when N=2. At the same time, just three lines correspond to N=10.
V. Charting of slanted channels according to T. Hartley (?Analysis of channels?)
There exist 4 types of trend channels: there are 2 channels per each of the two markets, where the trends are directed upward and downward, respectively. Trend channels connect points of extreme prices of closing (the highest and lowest ones).
Figure 1 depicts the upward-directed channel (resistance). One should detect the two lowest prices of closing and draw the line #1. The use must be made of the uppermost maximum price of closing between the two minimum prices of closing in order to draw a line, parallel to the 1st one. This channel indicates the level, up to which the price can rise. In this way, one can estimate the potential profit, obtainable during the ?rising tide? of money in the trend. While the market is moving towards a new maximum price, one should draw a trend line through the two points that correspond to the highest prices of closing. In addition, one should draw a line, parallel to the previous one, through the lowest price of closing. In this way one gets the opportunity to detect the probable point of support under the condition of money ?falling off? against the trend. (For view the picture see notes in end of article)
Figure 2. The upward-directed channel (support) is depicted. One should detect the two maximum prices of closing and draw the line #1. The used must made of the lowest price of closing between the two maximum prices of closing in order to draw a line, parallel to the 1st one. (For view the picture see notes in end of article)
Figure 3. The downward-directed channel (support) is depicted. One should detect the two maximum prices of closing and draw the line #1. The use must made of the lowest price of closing between the two maximum prices of closing in order to draw a line, parallel to the 1st one. (For view the picture see notes in end of article)
Figure 3 depicts the steps, necessary for plotting a downward-directed channel. One should mark the two highest prices of closing for the line of support. A parallel must be drawn downwards to start from the lowest price of closing, located between the two above-mentioned points of the highest prices of closing. (For view the picture see notes in end of article)
Figure 4. The downward-directed channel (support) is depicted. One should detect the two minimum prices of closing and draw the line #1 between them. The use must be made of the outermost highest price of closing between the two minimum prices of closing in order to draw a line, parallel to the 1st one. This graph depicts the steps, necessary for plotting the line of resistance. The use is made of prices of closing in order to draw these guiding lines. Surely, in giving analysis to the channel, mistakes are possible. They can be conditioned by the intra-day sudden changes in prices. Notwithstanding this fact, the closing at a long distance from the prescribed level of resistance/support yields important information. Surely, being not always simple, such plotting requires a certain practice. (For view the picture see notes in end of article)
VI. Slanted channel technique according to V. Barishpotz (?moving price channels? or ?Barishpotz?s channels?) ? see ?Forex for the beginners? by V. Barishpotz
Issuing from T. Hartley?s channels, V. Barishpotz has changed their angles of slope, making it the function of local minimums and candle maximums.
V. Barishpotz is sure that, as far as he is concerned, this instrument is the most handy - notwithstanding its simplicity. The channel that contains two (or more) price waves is especially powerful. According to this author, the most efficient tactics of trading is the following. The trade must be directed towards the channel center to start from the channel bounds when ?stops? outside the channel bounds are rather strict. Often the reversal is more efficient than just a stop. This happens because the breakout through the channel boundary is a rather powerful signal ? especially if it coincides with the trend direction. If the directions of the trend and the breakout through the channel boundary don?t coincide, it is the signal either for the trend reversal or for the transition to a flat. For the position opening, it is better to wait until the price will overcome the previous peak ? e.g., during the downward-directed trend reversal to the upward trend. It is rather an important signal for reversal. As a rule, there appears either a ?double bottom? or a ?double summit? figures.
Thus, one can see that there exist 6 different techniques of plotting slanted channels.
In the next chapters we?ll examine the following problems:
? The points of opening and closing deals during the work within the framework of the slanted channel classical theory
? Mistakes during the work within the framework of the slanted channel classical theory, conditioned by the problems not solved by DeMark, Murphy, Neiman, Swagger e. al.
? The methods of solving these problems in Masterforex-V Trading System.
Note: Full text of this article and pictures of examples you can see on http://masterforex-v.su/002_005.htm
If you wish to be trained on Trading System Masterforex-V - one of new and most effective techniques of trade on Forex in the world visit http://www.masterforex-v.su/
Vyacheslav Vasilevich (Masterforex-V)Professional Trader from 2000 year.
President of Masterforex-V Trading Academy.
Author of Books:
1. Trade secrets by a professional trader or what B. Williams, A. Elder and J. Schwager not told about Forex to traders.
2. Technical analyses in Trading System MasterForex-V.
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