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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Chart Patterns: After the Buy
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Bulkowski's Drawing 3 Point Channels

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Industrials (^DJI):
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As of 11/24/2017
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800 or 750 by 12/01/2017
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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

This tutorial discusses drawing a channel when you only have three price turning points. Sometimes, the future price action will follow these channel lines, and you can use them to determine when the trend is going to change (price bounces off the channel line).

 

Inspiration for this article came from Erik in an email. He asked about the following paragraph from my book, Getting Started in Chart Patterns, Second EditionGetting Started in Chart Patterns, Second Edition book., page 29.

"When price pierces a downsloping trendline and makes a higher peak (note: this is the second, higher peak), connect the two peaks with an upsloping trendline. Then draw a new line parallel to the original trendline starting at the low between the two peaks. The lower trendline shows where price is likely to reverse."

I call this a three point channel.

Drawing Up-Sloping Channels

A chart of the Dow industrials (^DJI), on the daily scale.

Let us apply the technique to the Dow industrials (^DJI), which I show on the daily chart.

I drew a blue trendline along the peaks. Peak A appears, piercing the down-sloping trendline. Then price reverses to form a bottom at C followed by a second peak, higher than A at B. If you draw a line connecting A and B, you get an up-sloping trendline. This outlines the new direction price is expected to take.

Draw another line connecting valley C and parallel to the A-B line. This new line, which I show as line C-D, except extended into the future, forms the bottom of a channel. Price is expected to touch the bottom of the channel, and it does at D, reversing there.

This technique of drawing a channel with only three points, A, B, , and C works when the new price action follows a trend, which is rare. Although it does not always work, it can give you a jump on where price is expected to turn.

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Drawing Down-Sloping Channels

A chart of the 3 point channel for up trends.

Three point channels also work for up-sloping trends, too. Reference the ideal situation as depicted in the chart on the left.

  1. Draw an up-sloping trendline along the valleys which I show as line D-E.
  2. Look for price to pierce the trendline, moving lower and forming a valley at A.
  3. Price recovers and forms a peak at C.
  4. Price drops to a new low at B, below A.
  5. Draw the A-B trendline.
  6. Draw another trendline parallel to A-B, touching peak C.

The next bounce upward may touch the top channel trendline if all goes according to plan. Adjust the trendlines as future price movement dictates.

 

Drawing 3-Point Channels: Book References

Two of my books discuss three point channels.

Trading BasicsTrading Basics: Evolution of a Trader book. has the information starting on page 122. It's visual tip #41: "Drawing Three-Point Channels."

 

 

Swing and Day TradingSwing and Day Trading: Evolution of a Trader book. has coverage of "Trading using Channels" starting on page 15.

 

-- Thomas Bulkowski

 

See Also

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Support mental health or I'll kill you!