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Technical Analysis > Trend Analysis > Standard Deviation Channels
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Trading Standard Deviation Channels

Standard deviation channels are plotted at a set number of standard deviations around a linear regression line. They can be usefully applied to swing trading (as well as for detecting changes in momentum).

Visually identify a stable trend on the chart and fit standard deviation channels by dragging your mouse over the selected time period.

Example

Sydney Gas Limited [SGL] is plotted with trend channels drawn at 2 standard deviations around a linear regression line. After equal lows in December 2005 and August 2006 SGL started to rally.

  1. The signal to go long is identified when the secondary reaction (or consolidation) at [1] respects the 100-day Exponential Moving Average.
  2. Accompanied by strong accumulation with Twiggs Money Flow holding above the zero line.
Sydney Gas Limited standard deviation channel Dec06

Mouse over chart captions to display trading signals.

Channel lines are extended using Auto-Extend (right-click on the trendline).

  1. Opportunity to increase the position presents itself with another higher trough in the lower half of the trend channel
  2. A further pyramid opportunity
  3. Exit when price reverses below (or respects) the top trend channel
  4. Another entry signal when price completes a double bottom at the lower trend channel
    (price is above the 100-day Exponential Moving Average and Twiggs Money Flow has respected zero)
  5. An opportunity to increase (pyramid) your position when price respects the lower channel line.
Sydney Gas Limited standard deviation channel Feb07

Mouse over chart captions to display trading signals.

Trend Channel Stop Loss Orders

  1. Place your first stop loss below the down-swing at [1] on which you entered.
  2. On subsequent troughs, move the stop loss up to below the lesser of:
    • the lower channel line, and
    • the low of the trough.
    If the new stop level is lower than the previous stop, leave the (higher) old stop in place.
  3. Even if the trough is in the upper half of the trend channel, set the stop loss at the lower channel line.
  4. When price penetrates the top trend channel, move your stop loss to the upper channel line.
    If price breaks clear of the channel, keep on moving your stop up along the upper channel line each time that a new trough respects the channel line.

Mouse over chart captions to display trading signals.

  1. On the second entry, place your initial stop loss below the trough
  2. Move the stop loss up to below the subsequent trough, (which is also below the lower channel line)
  3. The next trough is in the upper half of the trend channel, so set the stop loss at the lower channel line.

Standard Deviation Channel Setup

See Help: Trend Channels for directions on how to set up standard deviation channels.

I normally use 2 standard deviations, which enclose roughly 95% of the selected data. Using 3 standard deviations encloses about 99% of the selected data but the channel often appears too wide.



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