Ask Colin

You mentioned a channel line. What do you mean by this?

I cannot remember the exact context for this. However, a channel line is generally a line drawn parallel to a rising trendline through the highs of the rallies or parallel to a falling trendline through the troughs of the declines. Channel lines are also commonly drawn above and below moving averages. In this case, the correct description is an envelope line. They are usually drawn a certain percentage above or below the moving average.

The most basic use of these channel or envelope lines is to identify when the price is stretched on the upside or the downside. On the upside the cannel and envelope lines are what Dr Elder calls greater fool prices - prices which are so far from value that the only hope in buying is to find a greater fool to sell to in order to make a profit. Value, of course is near the moving average or trendline.

With channel lines on a trend, it has also been observed that if a move is so strong as to burst through the channel line, the next correction back to the trend line is often the one that ends the trend.

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