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18  CHAPTER HISTORY The history of trading bands, envelopes, channels, etc., is long and interesting. Only the highlights are covered here, enough to provide you with an idea of the origins of the craft and a sense of perspective.1 Perhaps it is best to start with definitions. Trading bands are bands constructed above and below some measure of central tendency-for example, a moving average shifted up and down by some percentage of itself. Bands need not be symmetrical, but they do reference some central point. Envelopes are constructed around the price structure, above a moving average of the highs and below a moving average of the lows, for example. Envelopes may be symmetrical, but most often they are asymmetrical and do not refer to a central point. Channels are parallel lines drawn around prices such that the channels touch the price structure at key points.
Part II: The Basics The earliest citation we have uncovered comes from Wilfrid LeDoux, who copyrighted in 1960 the Twin-Line Chart (Figure 6.1). A simple but elegant approach, it called for connecting the monthly highs with a black line and the monthly lows with a red line. Several rules were given, the clearest of which called for a buy when the red line (monthly lows) exceeded a trough made by the black line (monthly highs) by two points. The idea of this technique was to clarify chart patterns that resulted in major swings to help time ones operations in a given stock with maximum efficiency. We have not tested this technique, but the examples we have seen suggest it works admirably. Mr. LeDoux commenced operations in 1918 and was wiped out by 1921, an unfortunate occurrence that led to his research. The first tools he employed, circa 1930, were his ROBOT charts, called Detectographs, which also focused on highs relative to lows and vice versa, though a technique we have been unable to uncover. Unfortunately, we are also unable to discover the precise time he started deploying channels. Suffice it to say that it had to be prior to the publication of the Twin-Line Chart in 1960. LeDouxs use of monthly charts is quite striking. Clearly, this points to the long-term orientation that was more prevalent in his day. At that time, the terms overbought and oversold were used exclusively to refer to long-term, climactic tops and bottoms, exactly the types of events that one would be able to observe clearly on monthly charts. This is especially interesting in light of the broad use of these terms today to apply to the shortest possible time frames. The markets clearly do evolve. At about the same time LeDoux copyrighted his Twin-Line technique, Chester W. Keltner hinted at things to come when he published the Ten-Day Moving Average Rule in his 1960 book How to Make Money in Commodities (see Figure 6.2). Keltner began by calculating the typical price-add the high, low, and close for a given period and divide by three.2 He then took a 10-day moving average of the typical price and plotted it on the chart. Next he calculated a 10-day average of the daily range (high-low). In downtrends he calculated and plotted a line equal to the 10-day average of the typical price plus the 10-day average of the range. This was the buying line, the line where you covered your short position and went long (reversing your position from short to long). In uptrends the average of the daily range was subtracted
Chapter 6: History JFMAJASGCFMAltWASOFMAliUIASC Wi u ISM TOP FORMATION - 1861 1362 SOUK OF MOtTTHLV DATA: M, . ? h Co. Hew Vert BARROVS, New TferJt Th* m»rt*t-liming "TWIN-LINE" CnrafMjlr Chi ft iftdLc&EeS Wti*n l<? -uy or S*Ik I &y WILFBID LEDOUX The "TWUi-LIWE"opcr»¹i in accftrd uittl the »1* co4e in iF»rk*i operation. Tfin "TWCH-L1NE" r*verHM jiself only it Ihe ertd of ITBr miriiet * mini], TOf OBMATIOW - SELL H > St 11 DOW JflNRS INDUSTRIAL AVERAGE   SELL i SELL-SHOUT MONTHLY Pries Rojigv The : BUY SELL ut ™- ] »« ind »l L H fL* BUY BOTTOM fc*m AtIOU stay oh the trend of- mahket swings crow high Plow Fticc Figure 6.1 Twin-Line Chart, an early example of trading envelopes. (source: The Encyclopedia of Stock Market Techniques, New Rochelle, N.Y.: Investors Intelligence, 1985.)
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