Channeling is one of the most reliable and accurate trading techniques that provide traders with precise entry and exit points as well as stop-losses and take-profit recommendations.
Channeling stock is a stock that moves up and down in repeated waves between two parallel lines. A lower line is called a support trendline and an upper – a resistance trendline. A support trendline connects the series of lows and resistance connects the highs. The area between these two lines is referred to as the channel. We need at least 4 dots (2 lows and 2 highs) to draw the channel. The more times the price touches and rebounds from the support and resistance lines without penetration, the more significant and reliable the channel becomes.
There are three types of channels:
– An ascending or a rising channel makes consecutive higher highs and higher lows.
– A descending or a falling channel makes consecutive lower highs and lower lows.
– A horizontal channel or a rectangle channel makes horizontal highs and lows.
Channeling offers several different efficient techniques for each type of channels. The most effective way of trading channel is to trade in the direction of the channel, going long at rising channel and shorting the falling channel. There are following basic rules of channel trading:
– Buy (or cover short position) at support level
– sell (or take a short position) at resistance level
Channel is considered “trade-able” if it consists of at least two lows and two highs.
Following is the real life example of how you can profit using this simple technique. Let’s look at the chart of QQQQ for the period from the January 2004. We can easily locate two relative highs: 38.54 in January 2004 (1/20/2004) and 40.33 in December (12/15/2004) and two relative lows: 32.52in August 2004 (8/13/2004) and 34.98 in April 2005 (4/29/2005). Now we are able to draw two trend lines – a resistance line connecting two highs and a support line connecting two lows. These lines are near parallel giving as a perfect channel. Following our basic trading rules we can place a buy order when the price crosses the support trend line and sell when the price crosses the resistance trend line. This simple technique will provide you with the perfect trading entry/exit points: sell on January 6, 2006 at 42.5 and buy on May 23, 2006 at 38.65.
There are several ways to locate the channeling stocks. You can manually look through charts or utilize the pattern recognition screener. Following links provide you with the list of channeling stocks and ETFs.
To narrow your search you can use an advanced technical analysis filter to find a list of channeling stocks and ETFs with price testing the support or resistance line. For example, use the following links to find a list of equities with rising channel pattern with price near support level and equities with falling channel near resistance.