Price-channels evolve through a distinct life-cycle, which are described here. RuleTrader tracks the life-cycle’s phases for you, which may be useful to avoid jumping on a trend too early or too late. Please note this is still experimental, so caution is advised. A particular issue is that the early phases may occur in the past, while the channel is being backfilled, so will not be detectable by your trading rules.

The reason for this is that when RuleTrader has detected the end of a trend, it searches back in the price-series to find the likely starting point of the new trend and backfills the new channel from there. This maximises the data available to construct the new channel and is why a channel always appears to start before the previous channel has ended (assuming you have ‘Display channel from trend start‘ checked in Channel Styles Settings). Because of this, the Breakout and Retracing phases (in particular) of the new channel may well occur in the past during this backfill period, where the channels overlap.

The channel life-cycle phases that we’ve identified are as follows:

The first phase of the life-cycle occurs when the price breaks out of a previous price-channel and establishes a new channel. Often the price will move in a fairly straight line so the channel can be extremely narrow, with a very low standard deviation versus the trend. At some point the rally will fail and the price swing will reverse direction.

Once the first price swing reverses and a new, second swing is established in the opposite direction the channel enters the Retracing phase. How far the price retraces often determines whether the channel continues in the direction of the original breakout, ends up flat, or starts swinging in the opposite direction. During the Retracing phase, the channel is usually forced open by the counter swing, so its standard deviation rapidly increases, while its gradient rapidly changes.

Once the retracement ends and a new, third price-swing starts, the channel is said to be Evolving. It will stay in this phase while its width and/or its gradient is still fluctuating significantly.

When the Evolving channel settles down and its width and gradient have, to a degree, stabilised, it is Established and may be more useful for predicting tops and bottoms in the price-swings. Please note that, though the channel will stay in the Established state until it breaks, it may well re-enter a phase where its gradient and width start fluctuating again, reminiscent of the Evolving phase.

This extra state, which is not part of the life-cycle phases, can be tested to indicate when a trend is starting to decay and the channel may break. However, it is not guaranteed that it will break, as the price may reverse back into the channel and so save it.