Dunnigan had realized by now that different measurements shouldbe applied to each market at different price levels. His next system, the Percentage Wheat‘Method, combined a 2%% penetration and a 3-day swing, introducing the time elementinto his work and perhaps the first notion of thrust, a substantial méve within a predefinedtime interval, With the 24%, 3-day swing, a buy signal was generated if the price of wheatcame within 2% of the lows, then'reversed and moved tip at least an additional 24% overa period of at least 3 days.
For Dunnigan, the swing method of charting* represented a breakthrough; it allowedeach market to develop its natural pattern of moves, more or less volatile than any other
7 William Dunnigan, Selected Studies in Speculation (Dunnigan, San Francisco, 1954, p. 7).
*.WD. Gann, How to Make Profits in Commodities (Lambert-Gann, Pomeroy, WA, 1976). This book devotes alarge section to swing charts and includes many examples of markets prior to Dunnigan’s work.
 
WILLIAM DUNNIG#.« AND THE THRUST METHOD 291
market. He had a difficult time trying to find one criteria for his charts that satisfied all mar-kets, or even all grains, but established a $2 swing for stocks where Rhea's Dow Theoryused only $1 moves. His studies of percentage swings were of no help.
The Thrust Method
Dunnigan’s final development of the Thrust Method combined both the use of percent-age measurements with the interpretation of chart patterns, later modified with somemathematical price objectives. He defines a downswing as a decline in which the currentday's high and low are both lower than the corresponding high and low of the highestday of the prior upswing. If currently in an upswing, a higher high or higher low will con-tinue the same move. The reverse effect of having both a higher high and low wouldresult in a change from a downswing to an upswing. The top and bottom of a swing arethe highest high of an upswing and the lowest low of a downswing, respectively. Itshould be noted that a broadening or consolidation day, in which the highs and lows areboth greater or both contained within any previous day of the same swing, has no effecton the direction. .In addition to the swings, Dunnigan defines the five key buy patterns:
1. Test of the bottom—where prices come within a predetermined percentage of aprior low :
2. Closing-price reversal—a new low for the swing followed by a higher close than theprior day
3. Narrow range—where the current day's range is less than half of the largest rangefor the swing
4, Inside range—where both the high and low fall within the prior range
5. Penetration of the top—by any amount, conforming to the standard Dow theorybuy signal
All of these conditions can be reversed for the sell patterns. An entry buy signal wasgenerated by combining the patterns indicating a preliminary buy, with a thrust the nextday confirming the move. The thrust was defined as a variable price gain based on theprice level of the market (for 1954 wheat, this was from % to 1%¢). Dunnigan’s systemattempted to enter the market long near a bottom and short near a top, an improvementon the Dow theory. Because of the risks, the market was asked to give evidence of achange of direction by satisfying two of the first four patterns followed by a thrust on thenext day. Any variance would not satisfy the conditions and an entry near the top or bot-tom would be passed. :
The same buy and sell signals applied to changes in direction that did not occur atprior tops and bottoms but somewhere within the previous trading range. In the event allthe conditions were not satisfied arid prices penetrated either the top or bottom, movinginto anew price area, the fifth pattern satisfied the preliminary signal and a thrust couldoccur on any day. This was not restricted to the day following the penetration. So that ifnothing else happened, Dunnigan followed the rules of the Dow Theory to insure that amajor move would not be missed. ~
It has been said by followers of Dunnigan’s method that his repeat signals are thestrongest part of his system; even Dunnigan states fhat they are more reliable althoughthey limit the size of the profit by not taking full advantage of the trend from its start.Repeat signals use relaxed rules not requiring a new thrust because the trend has alreadybeen identified. Two key situations for repeat buy signals are:
1. A test of the bottom followed by an inside range (interpreted as market indecision)2. A closing price reversal followed by an inside range 
 
 
uA
nena
292 CHARTING SYSTEMS
A double thrust occucs when the first thrust is followed immediately by a secondthrust; or, after the first thrust, a congestion area develops, followed by a second thrust inthe same direction as the first. Although Dunnigan used a fixed number of points to definehis thrust, today’s traders may find the standard deviation of the daily price changes oranother volatility measure as a more practical basis for identifying significant price moves.
One-Way Formula
Dunnigan worked on what he hoped would be a generalized version of his successfulThrust Method and called it the One-Way Formula, Based on his conclusions that theThrust Method was too sensitive, causing more false signals than he was prepared toaccept, he modified the confirmation aspect of the signal and made the thrust into the pre-liminary signal. He also emphasized longer price trends which smooth performance andreduce signals.
With the upswing and downswing rules remaining the same, Dunnigan modified thethrust to require its entire range to be outside the range of the prior day. For a preliminarybuy, the low of the day must be above the high of the prior day. This is a stronger conditionthan his original thrust, yet only constitutes a preliminary buy. The confirmation occursonly if an additional upthrust occurs after the formation of, or test of, a previous bottom.There must be a double bottom or ascending bottom followed by a thrust to get a buy sig-nal near the lows. If the confirmation does not occur after the first bottom of an adjust-ment, it may still be valid on subsequent tests of the bottom.
For the One-Way Formula, repeat signals are identical to original confirming signals.Each one occurs on a pullback and test of a previous bottom, or ascending bottom, fol-lowed by an upthrust. Both the initial and repeat signals allow the trader to enter after areaction to the main trend: The Dow approach to penetration is still allowable in the eventall else fails: The refinement of the original thrust method satisfied Dunnigan’s problem ofgetting in too soon.
The Square-Root Theory
‘The two previous methods show a conspicuous concentration of entry techniques and anabsence of ways to exit. Although it is valid to reverse positions when an opposite entrycondition appears, Dunnigan spends a great effort in portfolio management” and risk-reward conditions that were linked to exits. By his own definition, his technique would beconsidered trap forecasting, taking a quick or calculated profit rather than letting thetrend run its course (the latter was called continuous forecasting).
‘A fascinating calculation of risk evaluation and profit objectives is the Square-Root The-ory. He strongly supported this method, thinking of it as the golden”® key, and claimingsupport of numerous esoteric sources such as The Journal of the American StatisticalAssociation, The Analysts Journal, and Econometrica. The theory claims that prices movein a square root relationship. For example, a market trading at 81 (or 9°) would move to64 (8%) or 100 (10°); either would be one unit up or down based on the square root. Therule also states that a price may move to a level that is a multiple of its square root. A sim-ilar concept can be found greatly expanded in the workS of Gann (Chapter 14).
NOFRI’S CONGESTION-PHASE SYSTEM
Markets spend the greater part of their time in nontrending motions, moving up and downwithin a range determined by near-stable equilibrium of supply and demand. Most trend
° Bach of his writings on systems contained examples of multiple-fund management of varied risk.© Refers to the Greek description of Fibonacci ratios.
 
 
OUTSIDE DAYS WITr. AN OUTSIDE CLOSE 293
 
followers complain about the poor performance that results from markets that fail to movecontinuously in one direction. However, their systems are designed to conserve capital bytaking repeated small losses during these periods to capture the big move. Eugene Nofri’ssystem, presented by Jeanette Nofri Steinberg, is used during the long period of conges-tion, returning steady but small profits. Nofri’s system does not concern itself with the sus-tained directional move; therefore, the user of the Congestion-Phase System can wait to becertain of a well-defined congestion area before beginning a trading sequence.
The basis of the system is a 3rd-day reversal. If prices are within a congestion range andhave closed in the same direction for 2 consecutive days, take the opposite position on theclose of day 2, anticipating a reversal. If this is correct, take the profits on the close of trad-ing the next (3rd) day. Nofri claims a 75% probability of success using this technique, andthe Theory of Runs supports that figure. If there is a 50% chance of a move either up ordown on day 1, there is a 25% chance of the same move on the next day, and 124% chanceon day 3. Considering both commissions and variation in the distribution, an assumptionof 75% is reasonable.
Because the basis of the Congestion-Phase System is an unlikely run within a sidewaysprice period, the substitution of a 4-day run instead of the current 3-day run shouldincrease the profitability and reliability of the individual trades while reducing the numberof opportunities.
The Congestion-Phase System is only applied to markets within a trading range specif-ically defined by Nofri. Users are cautioned not to be too anxious to trade in a newlyformed range until adequate time has elapsed or a test of the support and resistance hasfailed. The top of the congestion area is defined as a high, which is immediately followedby 2 consecutive days of lower closing prices; the bottom of the congestion area is a lowprice followed by 2 higher days. A new high or low price cancels the congestion area. Any2 consecutive days with prices closing almost unchanged (for example, 2 ticks) are con-sidered as 1 day for the purposes of the system. These ranges occur frequently and can befound by charting prices using the last 10 days. In cases in which the top or bottom hasbeen formed following a major breakout or price run, a waiting period of 10 additionaldays is suggested to ensure the continuance of the congestion area and limit the risk dur-ing more volatile periods. Remember, systems that trade only within ranges offer manyopportunities that should be exercised with patience.
A congestion area is not formed until both a top and bottom can be identified. Pene-tration of a previous top and formation of a new top redefines the range without alteringthe bottom point; the opposite case can occur for new bottoms. Ifa false breakout occurslasting 2 or 3 days, safety suggests a waiting period of 7 days. Logical stops are also possi-ble, the most obvious places being the top and bottom of the current congestion area, butcloser stops could be formulated based on price volatility.
‘The Congestion-Phase System can stand alone as a short-term trading method or canbe used to complement any longer technique. When trying to improve entry or exit fills,the system qualifies as a timing device but only within the congestion areas defined by therules. It is not intended to be used in all situations. The converse of the system says that anentry signal given outside of a congestion area should be taken immediately becauselonger periods of prolonged movement in one direction are most likely, But in a tradingrange, the Congestion-Phase System may turn a moving average technique from a loser toa winner.
OUTSIDE DAYS WITH AN OUTSIDE CLOSE
‘There are numerous chart patterns that can be profitable if they are properly identified andtraded consistently. Unfortunately, any one pattern may not appear very often and traders294 CHARTING SYSTEMS.
 
may become impatient waiting for the opportunities. For others who may feel that overalltrading success is a combination of small victories, the outside day with an outside closeis one such successful pattern.
‘An outside day has the high and low outside the range of the previous day; that is, thehigh is higher and the low is lower. An outside close is one in which the closing price ishigher or lower than the prior day’s high or low, respectively. This is considered an attemptto move in one direction followed by a strong push in the other direction. If the close wasin the direction opposite to a recent price move, this is called a key reversal day;"' however,because the previous price direction is not distinguished, it is not necessarily a reversal butmay be a renewal of the trend direction.
A brief study by Arnold” showed that this pattern proved profitable for a small sampleof currencies, metals, and financials using the following rules:
1. Buy on the close of an outside day if the close is above the prior high; sell if theclose is below the prior low:
2. If buying, place a stop-loss just below the low of the outside day; if selling, place thestop just above the high.
3. Close out the position on the close 3 days after entry.
After studying exits on days 1 through 5 following the trade entry, Arnold concludedthat this formation predicts reasonably consistent price movements for the next 3 days.
ACTION AND REACTION
The human element in the market is not responsible for the ultimate rise and fall of prices,but for the way in which prices find their proper level. Each move is a series of overreac-tions and adjustments. Many stock and commodity analysts have studied this phenomenonand base entire systems and trading rules on their observations. Elliott's Wave Principle isthe clearest and most well-known of the theories founded entirely on this notion. Tubbs’Stock Market Correspondence Course is the first to define the magnitude of these reactionsin the Law of Proportion; and, in 1975 the Trident System was based on both the patternsand the size of the action and reaction.
Retracement of a major bull campaign is the mast familiar of the market reactions andthe one to which almost every theory applies. It is virtually unanimous that a 100% retrace-ment, back to the beginning of the move, encounters the most important support level.The 100% figure itself has been discussed in terms of unity, referring to its behavioral sig-nificance. The next most accepted retracement level is 50%, strongly supported by Gannand commonly discussed by experienced speculators. The other significant levels varyaccording to different theories:
Schabacker accepts an adjustment of % or %, considering anything larger to be a trend
reversal.
Angas anticipates 25% reactions for intermediate trends.
Dunnigan and Tubbs look at the larger 4, %, Or % adjustment. -
Gann takes inverse powers of 2 as behaviorally signifiednt: %4, 4, 4... -
Elliott bases his projections on the Fibonacci ratio and its complement (.618 and .382).
Predicting advances into new ground is also based on prior moves. Gann believed inmultiples of the lowest historic price as well as even numbers; prices would find natural
resistance at $2, $3,..., at intermediate levels of $2:50, $3.50, ..., or at two to threetimes the base price level. Elliott looked at moves of 1.618% based on a Fibonacci ratio.
4 See the discussion of key reversals in Chapter 8.© Curtis Arnold, “Your Computer Can Take You Beyond Charting,” Futures (May 1984).
ACTION AND REACTIVN 295
Fibonacci Ratios
Along with the most common 1, %, 4, and % retracement values, Fibonacci ratios are con-sidered of equal importance. Fibonacci ratios are found by dividing one number in theFibonacci summation series
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 14...
by the preceding or following value. The series is formed beginning with the values 1, 1,and adding the last two numbers in the series together to get the next value, The numbersin the series, especially those up to the value 21, are often found in nature's symmetry;however, the most important aspect of the Fibonacci sequence is the ratio of one value tothe next. Called the Golden Ratio, this value FW/Fy.1 approaches 1.618 as N gets large.Oddly, the inverse Fy. ,/Fy = 0.618, which is a feature that has drawn attention.
‘The Golden Ratio has a long history. The great pyramid of Giza, the Mexican pyramids,many Greek structures, and works of art have been constructed in the proportions of theGolden Ratio. These and some further examples are given in Chapter 14 where they arealso shown in context with trading systems. At this time it is important to recognize thatmany analysts who consider human behavior as the primary reason for the size of a pricemove and their retracements, use the Fibonacci ratio .618 or its reciprocal 1 — .618 = .382,as very likely targets. Elliott is the most well-known advocate, and applications of his WaveTheory are filled with these ratios.
Retracement rules have not been proved scientifically, but they are accepted by mosttraders. In general terms, the retracement theories, or revelation methods, can be cate-gorized as either proportional retracements or_ time-distance goals, Proportional re-tracement states that prices will return to a level that is clearly related, by proportion orratio, to the length of the prior price move. The larger the move, the clearer the retrace-ment. The percentages and ratios expected to be successful are those that are most obvi-ous: 100%, 50%, 33%, and so on, in addition to the Fibonacci ratio 1.618 and its inverse0.618. The time-distance rule is popularized in the works of Gann (also found in Chap-ter 14). Gann’s retracement objectives can best be thought of as forming an arc of a cir-cle, with the center at the price peak. The goal is satisfied when prices touch any pointon the circle.
‘Tubbs’ Law of Proportion
‘The technical part of Tubbs course in stock market trading is intense chart interpretation.‘The Law of Proportion presented in Lesson 9 is a well-defined action-and-reaction law. Incases where the nearby highs or lows of a swing were not broken, Tubbs claims four out offive successful predictions with his principle. The law states:
Aggregates and individual stocks tend to run on half, two-thirds, three-fourths ofprevious moves. First in relation to the next preceding move which was made.Then in relation to the move preceding that.
Applied to silver, an initial move from $4 to $6 would react % to $5, % to $4.67, or 4 to$4.50. Tubbs does allow for traditional price support as a major obstacle to the measuredprice retracement, and so unity (a 100% retracement) may be added to the three proportions. Figure 12-5 shows subsequent reactions to the silver move just described; the sec-ond reversal could be any of three magnitudes (or back to major support at $4.00), endingat $4.50, a % reversal, Reversals 3, 4, and 5 are shown with their possible objectives. Thelast reversal, 5, becomes so. smail that the major support levels (horizontal broken lines)are considered as having primary significance, along with proportions of moves 1 and 2.Major support at $4.00 coincides with % of move 1 and % of move 2. This would normallybe sufficient to nominate that point as the most likely to succeed. Tubbs indicates that 
296CHARTING SYSTEMS
eee
FIGURE 12-5 Tubbs’ Lawof Proportion.6.00
Reversalnotation
Ala8: 3caNo letters: unity
5.60
   
5.00
450—--~--f—----—
iii
objectives %
. (18)
ago3/18, 20)
— eee
         
these poinis rarely occur with exactness, but proportions serve as a valuable guideline. Theprinciple is one of reaction in relationship to an obvious preceding action.
Trident
 
‘The Trident Commodity-Trading System received its fair share of publicity when it wasintroduced at the beginning of 1975. An article in the 1977 Dow Jones Commodities Hand-book had an excellent review of the background of the system and some of the conflictssurrounding its presentation and subsequent successes and failures. The system itself isnot unique in concept but in its implementation. It is based upon the principle of priceaction and reaction with formations similar to the waves of R.N. Elliott. Fo? each Bricemove, there is a point of undervalue and overvalue with subsequent reaction, or adjust-ments. ia Price asit moves irregularly in the direction determined by the ultimate balance
‘The object of the system is to trade in the direction of the main trend but take advan-tage of the reaction (or waves) to get favorable entry and exit points. The concept of trad-ing with the trend and entering on reactions is discussed in the context of commoditytechnical analysis as early as 1942 by WD. Gann and in the preceding section on action and *reaction. The goal is to predict where the reactions will occur and what profit objective toset for each trade. Trident’s approach is easy to understand: Each wave in the direction ofthe main trend will be equal in length to the previous wave in the same direction. The tar,get is calculated by adding this distance to the highest’ or lowest point of the completedreaction. As with Elliott's principle, the determination of the tops and bottoms of the wavesis dependent on the time element used; the complex form of primary and intermediate :‘waves would hold true with Trident (Figure 12-6). s
Because there are inaccuracies in the measurement of behavioral phenomena, Tridentemphasizes the practical side of its theory by offering latitude in its choice of entry and exit
  
                                  
  
  
»3 Gann's work also discusses this topic specifically.
ACTIONAND REAC ON 297
 
FIGURE 12-6 Trident entry-exit.
? Target
fx Average Recommended Selling (Exit)
=5 > at 75% Level
23>
fF “+ MidpointSoff mn=
Sf 4 Average Recommended Buy (Entry)/ at 25% Level
§s
 
points. By entering after 25% of the anticipated move has occurred and exiting 25% beforethe target, there is ample time to determine that the downward reaction has ended beforeyour long position is taken and enough caution to exit well before the next reaction. A crit-ical point in each main trend is midway between the start of the move and the target. If themidpoint is not reached, there is a change in direction of the main trend causing a reeval-uation of the main trend and the reactions. A change of direction is considered conclusiveif'a reversal equal in size to 25% of the last reaction occurs during what was ‘expected to bean extension of the main trend. That 25% value becomes the trailing stop-loss on any tradein the event the objective is not reached.
‘This discussion is not intended to be a complete representation of the Trident System,but a brief description of its essential ideas. The actual system has substantial refinementsand subtleties in target selection for major and minor trends and corrective moves; itincludes points to reverse positions based on the trailing stop.
Ina later bulletin to Trident users, it was suggested that a modification to the systembe implemented with respect to money management. Using a technique similar to theMartingale System, each loss is followed by an increase in the number of positionstraded The trader only has to continue to extend his positions and stay with the systemuntil he wins. A comprehensive version of this classic gambling approach can be foundin the section “Theory of Runs,” in Chapter 17. The Trident concepts are all reasonableand generally accepted by experienced traders. They inchude advance and retracement,taade the trend, don’t pick tops and bottoms, take the center out of each move, and use
a trailing stop. _
 
 
 
Rethinking Retracements
Interesting observations were made by Tom DeMark!* about identifying the price movethat serves as the basis for measuring retracements. If the market is currently at a low,rather than judging the distance of this drop from the most recent swing bigh, he choosesfo look for the highest point that has occurred since the last time the market traded at thislow level, He then finds the most likely retracement points using the Fibonacci ratios 618,and 1.618, plus Fibonacci alternatives 382, .50, 1.382, 2.236, and 2.618 applied to the difference between the high and low, added to the current low price.
¥ Tom DeMark, “Retracing your steps,” Futures (November 1995). Also see Chapter 2 of DeMark, The New Scienceof Technical Analysis (john Wiley & Sons, 1994). 
298 CHARTING SYSTEMS
CHANNEL BREAKOUT -
The classic channel is formed by drawing a straight line along the bottom of an upwardtrend (or the tops of a downtrend), then constructing 2 parallel line that touches thecotreme high price of that same time interval, forming an envelop, or channel, around aprice move. It is easy to do this with a chart and a ruler, but not as simple to transfer thisconcept to a computer program. Because the concept of a channel breakout is basic tocharting, an automated version may prove useful for identifying key market turning points.The steps to creating a program are as follows:
1. Create a swing chart to identify key high and low points. A construction of a swingChart was discussed in the first section of this chapter, “Finding the Swing High andLow Points.” This method used a minimum swing value, MSV, to identify a swing highor low. For example, once a price had declined from its recent high by the MSV, thatprevious high becomes the last swing high. The swing highs and lows are thereforeOnly found afterthe-fact. When a larger MSV is used, the points identified as swinghighs and lows become farther apart and are consi ered more important, or majorswings. By creating two swing charts using a small and a large minimum swing value,sve can show both major and minor market price swings (see Figure 12-7). °
2. Find a straight-line trend. Beginning with the last swing high or swing low, use theleast-squares linear regression to find the straight line through the center of pricesthat have occurred since that high or low: :
Straight-line value Y= a x date +
3, Draw channel bands. Beginnitig at the previous swing high or low, calculate thevalue Y of the linear regression line at all points up to the most recent date, and findthe two prices that are the farthest above and below the regression line. Theseprices will define the upper and lower channel bands:
Highest relative price H max = Ht - (aPt + 6)
Lowest relative price L max = (aPt + 6) ~ Lt
FIGURE 12-7. Major and minor swings.
Major high
    
Minor highs ——>,
rs
      
~ Major low
 
inor lows
Major low
 
 
 
CHANNEL BREAKOU+ 299
4.
 
where a and b are the linear regression slope and y-intercept. The channel band isfound by adding or subtracting H max and £ max from the linear regression straight-line formula:
Upper channel band = aPT + b + H maxLower channel band = @Pt + 6 — L max
Project the bands one period abead. To know whether the next price has brokenthechannel, indicating a change of trend, we project the channel one period aheadusing the slope value, 2,
Projected upper channel band t+ 1=aPt+b+HmaxtaProjected lower channel bandt+1l=aPt+b-Lmax+a
If the trend is up (the slope a > 0) and the next price is below the projected lowerband, then the trend has turned from up to down. If the trend is down (a < 0) andthe next price is greater than the projected upper band, then the trend has turnedtip. When the slope, 4, is very near 0, we have a sideways channel and the samerules still apply.
Because a major channel is considered a strong chart formation, prices that approachthe channel, but have not penetrated the band, would be candidates for trades. For exam-ple, if the trend is down and prices come within 15% of the upper band, we would wantvaditional short positions (see Figure 12-8). We do not necessarily want to lift those exist-ing shorts at the bottom of the channel, especially if the downtrend is severe; however, this
 
FIGURE [2-8 Entering near the top of a declining channel. Points A, B, and C define the newchannel. Trades can be entered at point El, exited at X/, then entered at E2 and £3 and exited
at X2.
  
300- CHARTING SYSTEMS
technique offers a clear and safe way to scale into a trade with more than one entry point.If the trend is sideways (the slope is near zero), then exiting shorts and reversing your posi-tion could work well.
A minor channel can also be used to signal buys and sells within a major channel. Byfinding swing points using a small minimum swing value, we can wait for a break of theminor channel to signal a trend direction within the major channel. This gives an addedconfirmation that prices are moving in your direction before entering.
MOVING CHANNELS
As Computers have become common, channels are frequently constructed as movingbands around prices. Some of these, such as those using a standard deviation, can claimstatistical significance (these are discussed in Chapter 5). A simple mathematical way ofrepresenting a channel might use the average of the high, low, and close to designate thecenter and a band based on the highs and lows. The midpoint of the price move M andheight or range R of the move can be calculated
awaay A.tL,+0)
1
 
R
N
‘Then, the upper and lower channel bands forecasted for the next day areUre =M, + WM, — Mp1) + WR,Lie =M, + Qt, — M,-1) — wR,
> G&-L)
The bands are created by extrapolating the average midpoint and adding or subtracting theaverage daily range R multiplied by a scaling factor w. A long position is taken when thenew price P,,; > U},,; a short is taken when P,,; <L;,1. If a channel profit objective isneeded, it can be,calculated at a point equal in distance to the channel width from thechannel breakout as follows
Long objective UO, ., = Uj41 + 2WR,Short objective LO, =Z,1— 2WR,
Because the value wR, represents one-half the band width, 2wR,, the objective is anequal band width above or below the breakout point on any day. The objective may remainfixed at the price level determined on the day of the breakout, or preferably, will changeeach day to remain one band width from the new channel value (Figure 12-9). This methodrelates closely to volatility measures and more examples can be found in Chapter 20.
‘An alternate way of defining a channel would be to forecast 1 day ahead using theslope of a regression analysis (Jinear for a straight channel, /og for a curved one) and use
the standard deviation of the price changes to define the band. The other rules wouldremain the same.’*
COMBINING TECHNIQUES
Richard D. Wyckoff, popular in the early 1930s, relied solely on charts to determine the
motives behind price behavior, He combined the three most popular methods, bar chart-
* For a further discussion of channels, see Donald Lambert, “Commodity Channel Index: Tool for Trading CyclicTrends,” Technical Analysis of Stocks & Commodities (Oct