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There is no question that surfing requires balance. Without it, it is simply not possible to surf. Unless you master this skill you certainly cannot hope to do any stunts where the real fun is. A Hang Ten maneuver is a prime example. This is a stunt where the surfer stands as far forward on a board as possible while riding a wave. It is hard enough for most people to stand up in the center of a board, let alone at one end of it. But this maneuver pushes the front of a board down, catching more of the wave and providing greater speed. Because you are so far forward on the board you have the illusion that you are literally walking on water, a very surreal effect. But you just don't get on a board for the very first time and do this trick. Even for the most experienced surfers it takes considerable practice and skill.

Just as balance is essential for a surfer, so too is balance necessary for a trader. You can study and master all the patterns you like, but if you don't understand how balance works within a market then you will stil l have trouble riding any move for a profit.

Every buyer needs a seller and every seller needs a buyer. If you have more buyers than sellers, then the price will rise. More sellers than buyers, then the price will fall. This is simply known as supply and demand and it is a basic principle of market value. W hichever way the buyer/seller balance is biased, it is a sure bet that the market will fol low. Traders spend fortunes betting on which way they think the bias is leaning. Many will simply use reports and gut feelings to make that decision, but the balance of power is

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already revealed in a subtle way by price action. Learn to see the subtleties that reveal it and you have the edge that everyone is looking for.

When a channel develops you will usually have both lines running parallel to one other, maintaining the same distance and the same angle during the course of the trend. This is a balanced trend. But when it comes to the battle between buyers and seller, balance is never permanent. So there are many times when channels do not follow the normal same distance/same angle course. These distorted channels are what reveal bias within the balance of power. I n fact, anytime you see that both channel lines are not

in agreement then an imbalance exists.

I f you have studied basic technical analysis before then you are already familiar with a host of patterns that have non-parallel channel lines. One such example would be that of the triangle pattern which has both lines angled toward one another. Depending on how the triangle forms, standard technical analysis tells you something of the bias in the market based on the pattern's shape or the angle of its l ines. A n ascending triangle has an upward bias, a descending triangle a downward bias and a symmetrical triangle has no bias until it makes a commitment one way or the other. The view of each of these patterns and their bias is based on past experience alone, but in reality the very shape and angle of the channels that actually form them already tel ls you what to expect. When you understand how to read the bias of channel lines patterns start to make a great deal more sense. Further, you are then able to apply these same principles to a much larger portion of price activity, far beyond that of just mere patterns.

When the balance of power is extreme as you find during a strong trend, then it is easy to determine what that bias is. But when it is subtle as it is during consolidation patterns then it is a much more difficult task to determine. Yet, it's during the subtle times that knowing the bias would be of the most benefit. So what is the secret to determining the bias in the balance of power?

The two factors that determine balance of power

There are two factors to consider when reading market bias, the overall direction of the channel and any distortion between the angles that form the two channel lines.

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The first factor is easy to understand. The overall direction of the channel indicates market bias. This means that if both channel lines are rising, then the market bias is upward fol lowing the direction of the channel.

It is as simple as up is up and down is down. When you have a trading range with two horizontal lines bordering price activity then the bias is neutral. So whatever direction the channel is facing indicates the bias of the market.

The second factor requires a little more effort to understand. Any distortion from a parallel angle between the two channel l ines indicates bias in the balance of power. This means that if the two lines are drawing closer to one another then there is a bias indicated. If they are drifting further away, then again, there is a bias indicated. In addition, how the altered channel l ines are directed in relation to the market further dictates how this bias would be interpreted. What this means is that both the angle and direction are important in determining market bias. So there are a series of configurations that we need to consider and although there are a number of them, they all fol low similar principles. The series is shown in figures 5-1and 5-2.

Channels are horizontal The balance of power is equal No bias is indicated

____ Channels are both dropping

____ Bears are in control and Bulls are in agreement Bias is downward and stable

Channels are both rising

---- Bulls are in control and Bears are in agreement

____ Indicated bias Is upward and stable

_____ Channels are directed toward one another

Both Bulls and Bears are advancing and pressure is building

____ No bias indicated, but the winner will likely reap a big reward Channels are directed away from one another

---- Both Bulls and Bears are retreating and pressure Is dropping

_____ No bias indicated and the winner will reap a small reward

Both channels are falling, but the lower one is moving at a faster pace Bears have the power, but are getitng too greedy

Bias is currently bearish, but it is about to change to bullish

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Both channels are dropping, but not equally Bears have more power, but bulls are fighting back

---- Bias is changing and indicates the bulls are about to take power

- - - ,

---- Both channels are rising, but not equally

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Bias Is changing and Indicates the bears are about to take power

____ Upper channel is dropping while the lower channel is holding fast Bears have the power, but bulls have taken a firm stand Bias is bearish and pressure is building for a downward move

lower channel is rising while the upper channel is holding fast Bulls have the power, but bears have taken a firm stand

---- Bias is bullish and pressure is building for an upward move

Both channels are rising, but the upper one is moving at a faster pace Bulls have the power, but are getitng too greedy

Bias is currently bullish, but it is about to change to bearish

As you look at this series, some of the configurations and bias indications may seem at first contradictory. For example, if the upper line rises slower than the lower line, why does this indicate a bearish move when both are sti l l rising? Now compare this to the pattern where a horizontal line stopped prices from advancing any higher while the lower line continues to ascend, why is this bul lish? Both of these examples fit descriptions of a wedge and an ascending triangle and their indications are probably already familiar to you, but the real question here is why do they indicate what they do? Understanding the why and how would give you the opportunity to apply these same principles to other situations other than a few well­

known patterns.

The answer to why and how is inseparably connected to crowd psychology.

There is a battle going on between buyers and sellers. The upper line represents the battle line of the buyers, while the lower line represents the battle line of the sellers. Remember, a buyer is looking to purchase at the very best possible price and may have previously sold short. So it is not in his best i nterest to have prices rise higher, at least not until he has actually bought. On the other hand, a seller is looking to sell at the very best price that he can obtain. Here again, he may have already bought or is simply looking to sell short. Either way, he does not want price to drop further, at least not until he has actually sold. It is those who accept the offers that change the value of a market and these are the ones looking to buy or sell, not those who already hold positions. In actual trading there is a bid price and an ask price where buyers and sellers make offers to the other

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side. The bid price is what the buyers are offering and is natural ly lower than the ask price, which happens to be what sellers are offering. Each is offering what they think they can get from the other side.

The battle between buyers and sellers through the bid/ask spread is nothing more than the balance of power at work and the principles of this struggle extend to a greater level far beyond this momentary spread. The bid/ask action gives us our first glimpse as to who has the upper hand. But unless you are a floor trader exploiting the bid/ask spread, it really is of l ittle use for determining which way a market is leaning. The spread is j ust too narrow and short I ived for most trading. So our view of this battle has to extend to higher ground, the battle lines of channel lines.

In any advancement, up or down, it is the line that is pushing the market (the inside channel line) that is key to the trends design and survival. This is why an exit is always called for when the inside l ine is broken, while in contrast the outside line has some exceptions. When there is a distortion in the parallel of the two lines the culprit is usually the outside channel line because this is the variable in the equation. But even variables have l imitations. If the outside line advances too fast for the inside line to keep up then the market will exhaust itself. The inside line's help is needed to sustain any move. Such an advance in an uptrend would demonstrate that the sellers are over inflating the value by demanding more and that a few buyers are even giving into those demands. But not everyone is so willing, shown by the fact that the inside l ine continues to hold its position. Buyers who give in so willingly are usually just desperate and eventually these desperate buyers will dry up, ending the over-inflated run. When the outside line begins to snap back the gap alone between the two lines will create a sellers panic and cause prices to tumble down in haste.

As it is true with the bid/ask spread, the alignment of these two lines define who has the upper hand in a market, the buyers or the sellers. In fact, it is actually an extension of the bid/ask spread itself and so contains the extremes of what each believes they can get from the other. The advantage of channel lines is that they show greater depth of the battle between both sides and aren't limited to just a few minutes sampling of trading. So a history of the battle develops and the battle plan becomes obvious. The key to this battle is the inside I ine because it is the base that everything works off of. When the outside line begins to accelerate the important factor will be in how the inside line chooses to respond. If it fails to accelerate as fast as the outside line then the move has a serious problem and an i mbalance between the buyers and sellers exists. The common theme throughout all

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the configurations i l lustrated is that if both are not in unison, then a battle is taking place.

To get a better idea of how this battle relates to the action of channel l ines consider the example of a few patterns that you are already probably familiar with, triangles. There are three basic types of triangles;

symmetrical, ascending and descending. The l ines that are drawn to outline a triangle are in fact nothing more than channel lines, although they are non-parallel. As the l ines draw closer to one another, pressure builds up to a point where it is finally forced to break, usually resulting in a substantial move. But before this happens, the bias of that break or balance of power may already be indicated by the way the l ines have formed.

In an ascending triangle the outside line comes to a complete stop and is seen as a horizontal l ine, all the while the inside line continues to advance toward it. The very fact that an inside line is rising tells you that the bias is toward higher prices and that the power belongs to the sellers.

What makes this different than a wedge pattern is that the buyers have entrenched themselves and are refusing to budge at all, yet they are still losing ground. So not enough buyers are settling up and a point of buyer desperation is just around the corner. The buyers may be attempting to hold a battle line, but they can't stop the progression entirely and in time that battle line is likely to collapse and give way to higher prices.

Because triangles are so well documented in technical analysis publ ications you may already have a good handle on how to trade them. But there are times when they do not fol low their indicated bias or are subject to false breakouts. Using channel lines to make an analysis of a pattern can offer a critical insight as to who has the balance of power and which way a pattern is likely to break. Sometimes the balance of power will be indicated by the entire pattern. Other times you will have to look at individual pieces of the pattern as it develops. Either way, the bias is usually somewhere to be found in the pattern itself.

Obviously, a large cross-section of a pattern will provide you with the strongest indications of bias. But the advantage of small cross-sections is that they often provide the earliest indication of bias. The earliest warning can at times be the most critical when entering and exiting, so there is a great value in being able to interpret the balance of power with just the most subtle variations in channel lines that occur. The more subtle configurations that you can accurately read and interpret, the quicker you can respond. This in turn allows you to be able to enter or exit at better prices and greater profit.

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Often, the initial indication of bias rests in a single bar that doesn't quite reach as far as other highs or lows within a pattern. The signal may be subtle, but it is the first warning to where the balance of power is leaning and of course, where price is likely to be headed in the near future. Since price frequently moves rapidly after leaving any consolidation pattern, understanding these subtle signals can make the difference between making a quick profit and taking a quick loss. These subtle indications can be seen in a series found in figures 5-3 and 5-4.

Bar Indicated Bias During Trading Ranges

If the high, low or close are all equal, no bias is indicated

If the high, low or close is nearer to the upper channel line without actually exceeding it, then the bias is bullish

If the high, low or close is nearer to the lower channel line without actually exceeding it, then the bias is bearish

Bar Indicated Bias During Trends

Ifthe high low or closes are all equal in their location in the trend, no bias is indicated

Ifthe high, low or close is nearer to the upper channel line without actually exceeding it, then the bias is bullish

If the high, low or close is nearer to the lower channel line without actually exceeding it, then the bias is bearish

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As we go through the next few charts found (Figures 5-5, 5-6, 5-7, 5-8) see if you can identify the subtle indications that tell s you who is winning in the battle over the balance of power.

Bar has low close

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Another high close occurs just before the bullish move

Although bars are low within the channel,

high closes implv pending bullish move of Meta Stock z· .

So it is to your advantage to look beyond patterns and see what is actually happening within the action of price itself. It is fine to understand triangles, flags, wedges and so on, but the real signals are contained within the channels that actually form them. Besides, it is much easier to memorize the few channel patterns than all the hundreds of patterns that can develop on a chart. This holds true in regard to using candlestick charts as well.

Candlestick charts consider a much greater price bar detail than bar charts, but there are literally hundreds of candlestick patterns that you can spend a lifetime trying to master. On the other hand, Channel Surfing accurately

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determ ines the balance of power and is much easier to learn, to interpret, and implement.

Particularly when you see non-parallel channel l ines will there be subtle indications of a bias in the balance of power. While momentary bias doesn't guarantee that a market is headed in any specific direction, it does provide you with an early warning and will usually be the precursor to the market's direction when it finally commits to one. Any early indication in the balance of power can provide you with an edge, allowing you to have more success with your trading. I f, like a surfer, you get a handle

Particularly when you see non-parallel channel l ines will there be subtle indications of a bias in the balance of power. While momentary bias doesn't guarantee that a market is headed in any specific direction, it does provide you with an early warning and will usually be the precursor to the market's direction when it finally commits to one. Any early indication in the balance of power can provide you with an edge, allowing you to have more success with your trading. I f, like a surfer, you get a handle