I was going to dive right into a channel tools article, but it appears an overview, followed by a few articles, is warranted. This month's Analytical Toolbox series will also focus on the new channel tools features in Platinum Pro. A brief coverage of ProfitSource regression channels will also be provided.
A Channels category has been added to the top menu bar on Platinum Pro. The items included with this feature include:
- Chart capabilities
- Stock scanner
- Multiple strategy scanners
- Risk graph tool
- Editing functions
Some channel functions were previously working in the background for such scans as gyration finder. Now users can access more refined scans with channel finder, along with a variety of other tools.
Platinum Pro Channel Basics
Platinum Pro searches closing prices from the last 40 days through the last 150 days to assess trending conditions for a stock. The trend is identified by a line that best fits a particular segment of data and is representative of the closes for that specific period of time. Trend direction is determined by the line's slope and a channel created from the line by adding an upper and a lower line.
Channel characteristics include the following:
- A strong upward trend is represented by a center line with a larger, positive slope;
- A strong downward trend is represented by a center line with a larger, negative slope;
- A more volatile stock will move a greater distance around the center line, creating a wider channel;
- A less volatile stock will move a smaller distance around the center line, creating a narrower channel; and
- A channel constructed using more days is considered stronger than one constructed with less days.
Very fast uptrend and downtrends are considered unsustainable over longer periods of time; however, it's not to say the stock won't remain in an uptrend or downtrend. It may just do so at a slower pace. This may be seen as a shorter-term accelerated trend within a longer-term, wider channel.
The Platinum Pro channel is created by adding an upper line above the center line and a lower line below it. These are constructed by 1) adding a percentage of the center line's value at the start and end dates for the upper line, and 2) subtracting a percentage of the center line's value at the start and end dates for the lower line.
Risk Chart View
When you extend a line of best fit (regression line), you have a forecast for prices because you expect future closes to similarly use the line as a central reference area. Prices won't necessarily plot on that line, but rather move around it with some a little closer and others further away from it. Of course the reality for future prices in the market is anyone's guess, but from a stats approach, this is one of the best ways to consider what's expected down the road taking into account what has happened in the past.
Giving it an Isaac Newton twist, extending a line of best fit suggests that all future impacts to a stock will be similar to those experienced over the period the line was drawn. As a result, prices will continue along its current path. You need some type of different force from news to change the course of the stock's direction and throw it off that expected path.
A channel is added to the Platinum Pro risk graph by extending prices forward in time. Figure 1 provides position data for the top ranked trade on 9/2/09 after the close when using the Spread Channel strategy selection and a setting of "Force Channel to be in Profit Zone." So the focus on the position is probability of profit versus low risk to reward, which may or may not suit you. The focus here is to discuss how the channels are used with an option risk graph.
Figure 1: October Bear Credit Spread for GENZ
Figure 2 provides a view of the risk graph that includes the extended risk channel. It is the image that results after completing a Channel Stress Test.
Figure 2: Risk Graph View of Extended Price Channel
Since the dominant channel from a 40 through 150 days is downward, the risk graph view shows a shaded area that shifts downward as each expiration curve is reached. Currently there are 44 days to expiration and the channel width ranges from just above 46 to 56.5 (red curve). As you move forward in time towards 15 days to expiration (green curve) the channels ranges from approximately 45 to 54.5.
The risk graph view now includes a price projection, assuming GENZ continues to move within the channel, at various days to expiration. It's certainly possible that GENZ follows the shorter term upward trending channel resulting in a loss for the position, but the odds currently favor a profit at expiration. No guarantees, it's just statistics " what's expected based on past data.
On-Line Support & Style Considerations
Technology is a beautiful thing; to help the user maximize access to the added features, there are currently six videos addressing channel functions in Platinum Pro. They include those that provide a general overview as well as those that are specific to individual strategies. You may want to play around with the tools first, then check out the videos and return to the functions that most interest you.
Regression channels are very suitable for my trading style, so it is great to see all the different functions added in 2009. Since I tend to zoom in on specific features, I will definitely need to review a portion of the videos at a later date to get the most from the tools. Since I'm more of a trend trader, I seek longer-term, upward or downward trending channels. I need to determine if a higher % width for the upper and lower bands is also beneficial.
Traders focused on more sideways trending strategies should consider the default settings used in the different tools first since they were back-tested and set with the specific strategy in mind. Following technical trading guidelines, you generally do not want to change the default setting on an indicator unless you have a specific reason for doing so. In terms of the channels, you must understand how setting changes impact results in terms of speed (shorter versus longer-term), trend and volatility.
Always consider your style when assessing new tools. The tool may support current strategies by providing you with a secondary scanning method. It may also help fill in strategy gaps as you diversify the approaches in your trading plan, allowing you to trade successfully under a variety of market conditions.
To access other articles written by Clare White, please click here.
Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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