Channel trading is a powerful yet often overlooked form of trading that capitalizes on the tendencies of markets to trend. It combines several forms of technical analysis to provide traders with precise points from which to buy and sell, put stop-loss and take-profit levels and much more! This article will show you how to create and effectively trade these amazing instruments. Technical Analysis Channel Characteristics In the context of technical analysis, a channel is defined as the area between two parallel trendlines and is often taken as a measure of a trading range.

The upper trendline connects price peaks highs or closes, and the lower trendline connects lows or closes. An example of a channel is shown below. Breakout points in channels indicate bullish on upward trends or bearish on downward trends signals.

Channels are useful for short-to medium-term trading - not long-term trading or investing. The technique often works best on stocks with a medium amount of volatility. Remember, the volatility determines your profit per trade. Channeling also tends to work best when the technique is combined with other forms of technical analysis, at which we take a closer look below.

Finding an Equity Not all equities can utilize this technique as it requires that the underlying equity has an existing channel in its chart. Generally, a channel consisting of four contact points is necessary for the channel to be considered "tradeable.

Creating a Channel Channels are relatively easy to create using these four simple steps: Trading the Channel Channels provide a clear, systematic way to trade. In fact, these simple instruments can show you when to buy and sell, where to place your stop-loss and take-profit points, how to determine the reliability of the trade and how long you should expect the trade to take! Let's look at how these can be done.

Locating Buy and Sell Points Channels help locate optimal buying and selling points. Here are the standard channel trading rules:. There may be times when other forms of technical analysis are needed to enhance the accuracy of the channel plays, and verify the overall strength of the channel.

Using other techniques in conjunction with channeling can also help you avoid the side effects of the two exceptions listed above.

A few useful ones to keep in mind are:. Determining Stop-Loss and Take-Profit Levels Channels provide built-in money-management capabilities in the form of stop-loss and take-profit points. Here are the standard rules for determining these points:.

Determining Trade Reliability Channels provide the ability to determine how likely your trade is to be successful. This is done through something known as confirmations. Confirmations represent the number of times the price has rebounded from the top or bottom of the channel - in essence confirming the accuracy of the channel.

Here are the important confirmation levels to remember:. Estimating Trade Length The amount of time a trade takes to reach a sell point from a buy point can also be calculated using channels.

This is done by recording the amount of time it has taken for trades to execute in the past, then averaging the amount of time for the future. This strategy relies on the theory that channel price movements tend to be nearly equal in time and price.

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Conclusion Channels provide one of the most accurate methods from which to trade in any market. By "encasing" an equities price movement into two parallel trend lines, this simple chart can provide the exact points from which to buy and sell, create stop-loss and take-profit points, check channel strength and even estimate how long the trade will take.

This technique is a valuable asset to any trader. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

Charting A Path To Success By Justin Kuepper Share. Manually look through charts to locate channel patterns. Utilize software or a service that automatically recognizes channel patterns. Subscribe to a company that provides you with a list of equities to which this technique can be applied.

Locate a relative high and a relative low in the past from which to begin the channel. Locate another subsequent high and low that follows one of the three following patterns see table below: Ascending channel - higher high and higher low.

Descending channel - lower low and lower high. Horizontal channel - horizontal highs and lows.

3 Price Channels To Help You Find High Probability Trades

Draw two trend lines - one connecting the two highs, and one connecting the two lows. Note that these two lines should be near parallel. These two lines form your basic channel after there are at least two contact points with the upper channel and two with the lower channel. More contact points enhance the reliability of the channel. Here are the standard channel trading rules: When the price is in the middle of the channel, hold.

Two exceptions to these rules: If the price breaks through the top or bottom of the channel, then the channel play ends until a new channel is established.

If the price drifts between the channels for a prolonged period of time, a new narrower channel may be established. A few useful ones to keep in mind are: Moving average convergence divergence - These can be used to confirm channel movements, especially after a contact is made. Stochastics - These are useful to confirm channel movements. Volume - Analyzing volume ratios can also help you determine the strengths of different channel movements, which determine the overall channel strength.

Short-term moving averages - These can provide you with a short-term outlook on a channel play. They are most useful after a contact is made to confirm the change in direction. Candlestick patterns - These are useful for spotting channel breakouts. Here are the standard rules for determining these points: If you have bought at the bottom of the channel, set a moving take-profit point at the top of the channel. Also, set a moving stop-loss point slightly below the bottom of the channel, allowing room for regular volatility taking the beta into consideration.

If you have taken a short position at the top of the channel, set a moving take-profit point at the bottom of the channel. Also, set a moving stop-loss slightly above the top of the channel, allowing room for regular volatility taking the beta into consideration. Here are the important confirmation levels to remember: Very strong channel very reliable. EPD is making some very predictable moves momentum traders can profit from.

These stocks are all moving within trend channels. With prices of these stocks trading near the extremes of those channels, there's an excellent trading opportunity. These stocks have been within rising trend channels, but recently have broken the trend channel to the upside. Such a breakout usually signals two potential outcomes: These two stocks are in long-term rising price channels.

Currently trading near support, an upside move indicates another wave higher. A handful of commodity stocks continue to offer short-term trading opportunities as they move higher within a trend channel. These commodity-related stocks are in uptrends and currently near support, providing a buying opportunity. These stocks are moving within well-established trend channels and have recently pulled back toward channel support, presenting a potential buying opportunity.

Distribution channels fill that role. These stocks are currently trading near the bottom of trend channels but moving higher, presenting a buying opportunity. Understand what a distribution channel is and how companies use them to move product. Learn how to make a distribution channel Understand what a distribution channel is and how companies leverage them to sell products.

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