Channel theory is a technique which can be useful in helping to predict the maximum and minimum likely changes in individual share prices and, more importantly, the timing of those changes. Channel theory states that many share prices continuously roll between the support and resistance prices, and with surprisingly regularity.
Here is how the system works in practice : You have been studying a particular share for, say, six months and you have noticed that, approximately every month, it rises to around 1000p before falling back to 950p. Then, after a further period it begins rolling back towards 1000p. This offers a double opportunity for you to make money by accurately predicting the rises and falls and betting accordingly. You can bet on the shares to rise in price when they reach the lowest support price level – when, perhaps, other observers expect them to keep falling in price. You can also bet on them to fall in price when they reach the highest resistance level – when other observers are predicting them to keep rising.
If you study charts for the companies of your choice and see these patterns emerging you are likely to find that this ‘rolling’ occurs with surprising regularity, and all that remains is for you to interpret the pattern correctly. The only snag is that, eventually, most shares break out of their channel and fall down through the support line or break through the resistance line, in the event of which it is possible to lose heavily if you have relied on the theory too much!
Start to study charts and you’ll see all these patterns forming. Once you recognise trendlines, anticipating market movements becomes that much easier!