Channeling Stocks (or Rolling Stocks) can be a very accurate and reliable trading strategy that will provide the trader with exact entry and exit points.
When a stock repeatedly moves up and down in waves between two parallel lines it is said to be channeling or rolling. A line is drawn across the highs, and one across the lows. This forms the channel. The upper line is referred to as the resistance line and the lower line is referred to as the support line. Some traders choose to trade within the channel and will enter or exit the trade as price draws near the support or resistance line. Others prefer to trade breakouts, entering or exiting the trade, once it breaks out of the channel.
One of the greatest benefits of this strategy is that it gives us precise entry and exit points. Greed and fear are a trader’s worst enemies, but emotions have no place in a system that employs strict buy and sell signals, along with stop loss or trailing stop orders.
These are the three types of channels: the ascending channel, the descending channel, and the horizontal channel. The ascending channel is a rising channel that is identified by higher highs and higher lows. The descending is a downward channel that is identified by lower highs and lower lows. And, the horizontal channel (also known as the rectangle channel), is identified by horizontal highs and lows.
There are several ways to trade channels:
-Trade in the direction of the channel. Long positions can be entered in ascending channels, riding the price upward until the support line of the channel is broken. Short positions can be entered in descending channel, exiting, once price has broken through the resistance line.
-Trade within the channel. Long positions are entered as price bounces off the support line, and sold close to the resistance line. Shorts are entered as price bounces off the resistance line, and covered close to the support line.
-Trade channel breakouts. This strategy doesn’t provide an exit point. Longs are entered as price breaks through the resistance line and shorts can be entered when price breaks through the support line.
Check for channels in different time frames. Many times you can predict when a channel will be broken, by checking other time frames. The channel that you are currently trading in one time frame may be an advance or decline within a channel of a longer time frame. Choose the appropriate 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 simple, yet effective strategy that works well for the beginner as well as professional traders. As you should, with any new strategy, paper trade, before you add channel trading to your trading toolbox.