Trading Techniques  |  JAN 2000

Are Two Channels Better Than One? by Stephane Reverre

Are Two Channels Better Than One? by Stéphane Reverre This author tested two channels based on Bollinger Bands around a standard moving average and an application of the capital asset pricing model, and discovered that a combination of the two performs better than the two separately. Traditional wisdom states that ""The trend is your friend,"" and experienced traders know that it is far wiser to embark, even late, on an established trend than to play a correction against it. Many indicators have been designed to specifically predict a fledgling trend or an imminent correction, and out of these, channels have had some success. The channel family of indicators tries to glean pertinent information from the market by setting specified boundaries around the current movements of a stock, and it is unlikely that the stock will move out of those boundaries unless an unforeseen event occurs. I tested two channels based on Bollinger Bands around a technical indicator: a standard moving average and an application of the capital asset pricing model (CAPM). I discovered that a combination of the two performs qualitatively better than the two separately.

by Stephane Reverre