First, let's review what the various lines in TeamWork Channels are. Each TW Channel contains one ERRC, or Enhanced Raff Regression Channel; which is a Raff Regression Channel placed using the Williams'%R Indicator as a guide (my ERRC Color-Coder Expert helps me do this) and it is extended to the right. The TW Channel's parallel lines are created using Standard Error Channels and/or Standard Deviation Channels that use the same Start Date (SD) and End Date (ED) as the ERRC, but with incremental Units values to place them at different levels.
Let's review these three types of channels.
The makers of MetaStock, Equis International, describe the differences in the three channel tools in MetaStock on their web site's FAQs section:
What are the differences between the three channel tools...?
(There are actually four channel tools available in MetaStock now,
but the new Equi-Distant Channel is of no relevance to our discussions.)
Here's how MSN's Encarta defines: Standard Deviation
Here's how MSN's Encarta defines: Standard Error
Check out this Wikipedia article on: Standard Deviation
Check out this Wikipedia article on: Standard Error
The ERRC places its outer lines at the extreme distance from the Regression Line (RL)that the price moved anywhere in the SD to ED Range of the channel, either above or below the RL.
The Standard Deviation Channel places the outer lines based on the number of Standard Deviations you wish to use. The Standard Deviation is calculated on a Moving Average of the price movement within the SD to ED range, inclusive. It is a measure of how well the prices are adhering to the path of Moving Average.
The Standard Error Channel uses Units of Standard Errors to place the lines. Standard Error is calculated on the Regression Line, and is a measure of how well the prices are adhering to the path of the Regession Line. This is why I tend to have a preference for using Std Err Channels over Std Dev Channels for my TW Channels.
The ERRC and the TW Channel essentially measure the concensus of feeling for the stock during a particular trend, and when extended, they predictively chart levels of Support and Resistance based on the attitudes present during that trend.
TeamWork Channels don't just chart Support and Resistance to vertical price levels, but Support and Resistance to Rate/Speed of Price Change as well, indicated by the relative slope of the trend. Some move up rapidly, some down rapidly, others slope up/down gradually, and, in some cases the prices are moving sideways. You'll often see a TW channel impact the price plot and suddenly the price movement takes on the Rate of Change aspect of the TW Channel.
There is also a Volatility aspect of TW Channels. Some can use whole single-digit changes in the Units value to produce effective results, whereas others may require Units values incremented by half- or even quarter-Units. To put it another way, if you check the Units increment of the Standard Error Lines in a TW Channel, they may increment like this: 1, 2, 3, 4, 5,... 99. Others may run .5, 1, 1.5, 2, 2.5,... 99. Others, .25, .50, .75, 1, 1.25, 1.50, 1.75, 2.0,... 99. Experience in drawing TW Channels will give you skill at guessing which increment should be used.
I hope I've managed to express my opinion on why these channels work. I suppose the important thing is...they do!
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