As of 10/07/2024   Indus: 41,954 -398.51 -0.9%     Trans: 15,783 -31.37 -0.2%     Utils: 1,027 -24.05 -2.3%     Nasdaq: 17,924 -213.95 -1.2%     S&P 500: 5,696 -55.13 -1.0%	YTD  +11.3%   -0.7%    +16.5%    +19.4%    +19.4%	Targets    Overview: 09/30/2024     43,500 or 41,600 by 10/15/2024   16,800 or 15,700 by 10/15/2024   1,125 or 1,025 by 10/15/2024   19,000 or 17,600 by 10/15/2024   5,900 or 5,600 by 10/15/2024
Chart Pattern Indicator: on 10/7/24

As of 10/07/2024   Indus: 41,954 -398.51 -0.9%     Trans: 15,783 -31.37 -0.2%     Utils: 1,027 -24.05 -2.3%     Nasdaq: 17,924 -213.95 -1.2%     S&P 500: 5,696 -55.13 -1.0%	YTD  +11.3%   -0.7%    +16.5%    +19.4%    +19.4%
Targets    Overview: 09/30/2024     43,500 or 41,600 by 10/15/2024   16,800 or 15,700 by 10/15/2024   1,125 or 1,025 by 10/15/2024   19,000 or 17,600 by 10/15/2024   5,900 or 5,600 by 10/15/2024
Chart Pattern Indicator: on 10/7/24

Bulkowski on Drawing 3 Point Channels

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

• Drawing Up-Sloping Channels
• Drawing Down-Sloping Channels
• Book References
• See Also.

Inspiration for this article came from Erik in an email. He asked about the following paragraph from the FIRST edition of my book (the second edition is shown), Getting Started in Chart Patterns, 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

Refer to the slide presentation for instructions below the chart, in red. There are four slides which load quickly...

1 / 4

Draw a down-sloping trendline along peaks ABC, which I show as a red line. You're looking for price to climb above this line, which it does at D.

2 / 4

When price crosses the line and forms two peaks (AB) and a valley between them (C), you can draw the three point channel. Being by drawing line AB connecting peaks A and B and extend the line into the future.

3 / 4

Draw a line parallel to line AB at valley, C. Extend line C into the future, parallel to AB. If this technique works, price will follow this new channel...for a time (until it breaks out of the channel).

4 / 4

This is the completed channel. Price follows the channel upward until it pokes out the top of the channel, reverses, and makes a determined plunge to D, breaking out the bottom of the channel and continuing lower.

❮ ❯

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.

Drawing Down-Sloping Channels

I could not find an example of where a three point channels worked for uptrends. For example, look at the above chart of Abercrombie on the daily scale.

Price trends upward following trendline A. At B the stock punches through the trendline, heading down.

The stock forms two minor lows at CD with peak E between them.

Draw a new trendline CD and extend it into the future. Draw another trendline started at the peak (E) between the lows CD so that the new line is parallel to CD.

In this example, price doesn't stay within the new channel at all. It posts an immediate upward breakout.

In order for this technique to work, the stock must trend in the new direction. Sustained trends are rare, especially downward trends, so perhaps you should confine application of this technique to upward trends only.

Drawing 3-Point Channels: Book References

Two of my books discuss three point channels.

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

Swing and Day Trading has coverage of "Trading using Channels" starting on page 15.

-- Thomas Bulkowski

See Also

• This article explores channels, including partial rises and declines.
• These trading setups may interest you.
• Tutorials are located here. Click to see if I'm lying
• Read research studies written by internationally known author and trader Thomas Bulkowski.

Horse sense is the thing a horse has which keeps it from getting on people. -- Mark Twain