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Channeling StocksChanneling Stocks, or Rolling Stocks if you prefer, is an accurate and reliable trading system that gives the trader exact entry and exit points.A stock that repeatedly fluctuates in waves between two parallel lines are called channeling or rolling stocks. First, you draw a line connecting the highs, then draw one connecting the lows. These lines form the channel. The top line is called the resistance line and the bottom line is called the support line. Some traders trade inside the channel, entering or exiting trades as price nears the support or resistance line. Others trade breakouts, entering and exiting trades when they break out of the channel. The greatest benefit of this strategy may be that it provides us with exact entry and exit points. The greatest enemies of traders are greed and fear. But, when this system, that gives us strict entry and exit points, is used along with stop loss or trailing stop orders, emotion is taken out of the picture. There are three types of channels: Ascending channels, Descending channels, and Horizontal channels. Ascending channels are rising channels that are identified by higher highs and higher lows. Descending channels are downward trending channels that are identified by lower highs and lower lows. And, horizontal channels (also known as rectangle channels), are identified by horizontal highs and lows. In the image below we see an ascending channel.
Here are a few ways to trade channels: -Trading the direction of the channel. Long positions are taken in ascending channels, riding the advance until the support line of the channel is broken. Short positions are taken in descending channel, covering when price breaks through the resistance line. -Trading within the channel. Long positions are taken as price bounces off the support line, and sold when price draws close to the resistance line. Shorts are taken as price bounces off the resistance line, and covered close to the support line. -Trading channel breakouts. This strategy doesn't provide an exact exit point. Long positions are taken as price breaks through the resistance line and short positions are taken when price breaks through the support line. Channeling stocks appear in all time frames. Sometimes you can predict when a channel will be broken, by monitoring other time frames. The channel in which you are currently trading, may be an advance or decline within another channel of a longer time frame. Choose the correct time frame for your particular type of trading: Weekly or monthly charts for long term trading, daily charts for short term or swing trading, intra day charts for day trading. Channel trading is a very effective, yet simple strategy that works well for all traders from beginners to professionals. But, with any new strategy, you should paper trade, before adding it to your trading toolbox. Click here to learn more about channel formations from Dan Zanger
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