RuleTrader’s unique automatic price-channels are part of what makes it so powerful. They automatically track micro, short, medium and long term price-trends that typically last less than a week, a few weeks, a few months, or 6 months or longer, respectively. Our proprietary algorithms detect when trends start and finish on your behalf, so you don’t have to spend your time wading through charts to keep an eye on them. So effective are they, that our tests with the Example Investment System show that using these dynamic channels, rather than trends with a fixed period (the closest alternative), significantly boosts the system’s returns.

AutoTrend frames the trend with an automatically generated price-channel consisting of a best-fit trend-line with two parallel confidence lines, usually set at 2 standard deviations on either side of the trend-line. This frame provides a simple way to determine various statistics about the trend including: growth rate, length, width, standard deviation and the price’s position in the channel.

If you’re not familiar with standard deviations just think of them as (approximately) the average variation in a value, such as share prices, temperature readings, etc. Often, this variation is measured as the deviation from an average, over time. With price-channels, the standard deviation is the deviation from the channel’s trend-line.

Assuming a share’s prices are normally distributed around the trend-line (and they probably are), then a property of standard deviations is that you’d expect more than 95% of a share’s prices to land within the price-channel’s confidence lines. This is why the price peaks and troughs tend to occur inside those bounds, as the channel reflects the historic deviation of the price-series.

As a historic phenomenon, that’s all well and good, but as investors we need to know whether the position of the price in the channel today can provide guidance as to whether the price is likely to turn today (or at least in the near future). That would be a great help in judging whether today is a good time to enter or exit a position, to maximise the potential returns from that position.

Our experiments using AutoTrend price-channels show that over two-thirds of price-turns do occur at or beyond 1.6 standard deviations from the long channel trend line’s value today and over half occur at or beyond 1.9 standard deviations (the data is available here). So these levels could be used to determine the price-level at which to trade, with better than even odds of being near a price trough / peak, respectively.

To make it even easier, AutoTrend divides the price-channel into Named Band parallel to the trend-line (or TSD Bands, if you prefer). The outer named bands are called Turn-Bands (for obvious reasons) and can be set using these threshold levels. RuleTrader will automatically detect when the price enters these bands for you, to signal potential trading opportunities.

AutoTrend also automatically tracks where the lowest low, or highest high price has reached in the channel. This is useful for testing if a turn has happened and the price is now retracing (see Channel Band Tracking). So, for example, you could use these features to wait until the price has moved into or beyond the Turn-Bands and then started to retrace, indicating a likely high or low has been reached and it’s time to trade. As the probability of a turn increases the further the price goes (assuming the channel doesn’t break), we could also use that as an inverse guide to how significant the price turn should be e.g. how large a percentage pull-back from a peak or trough that we’re looking for.

By ‘framing’ a trend, our AutoTrend channels give you a very easy way to test the:

• Growth rate or gradient of a trend, so you can separate the high growth winners from the also rans
• Growth rate or gradient of price swings within a trend, so you can trade the swings or monitor price volatility
• Position of the price in the channel so you can easily determine where the price is relative to the local peaks and troughs
• Price at a position in the channel, either today or extrapolated forward in time, to get an idea of target price levels for entering and exiting a position
• The phase of a trend in it’s life-cycle (i.e. is it breaking out, retracing, evolving, or established) so you can avoid jumping in too early or too late

The remaining Help topics available on price-channels are:

• Channel Data: describes the various constructs that provide price-channel data, for use in your Trading Spec
• Channel Banding: discusses the ways we’ve divided the price-channels into bands, parallel to the trend-line, to make it very easy to locate the price’s current position in the channel and to discover the price at various thresholds in the channel
• Channel Lifecycle: takes you through the various stages of a channel’s life-cycle and how RuleTrader tries to determine those stages for you

The results shown below were derived by testing every share in the LSE Shares list with a market cap > £25M and with a price volatility > 0 and < 25 (so most of the ‘junk’ shares have been removed). You can do this analysis yourself using the Capture Data button in the ‘Trend, Price Swing & Turning Point Analysis’ section of the Test Dashboard’s AutoTrend Settings. The actual results were: