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Sep 17, 2007 - When it comes to price channels, there are plenty of setups every day, depending on the timeframe...
Some of the most obvious but profitable setups come from using the most obvious trading tools. The old standby—the parallel channels, has been around as long as technical analysis has. Despite many traders in modern times prefer using math indicators to find their setups, the good old parallel channels cab do the job just fine. It’s easy, unpretentious and best of all-- profitable. Parallel channels are based on the psychology of the market, following the peaks and valleys of traders being greedy or fearful. The motion of the prices can be seen by momentum of a trend, going up or going down. Price channels are drawn when two or more pivot highs and pivot lows. These two trendlines drawn above and below the pivots happen to have the exact or near exact degree of inclination. When identifying price channels, they require 4 to 5 pivots to qualify as one. Some parallel channels can extend greater than 5 pivots as shown in Figure 1 below. Normally, most break at pivot 4 or 5. If observed the market for these patterns closely, the result will become obvious when these pivots are broken after 4 or 5 are formed.
Rules are trading the channel are simple: buy at support (bottom trendline) and sell at resistance (upper trendline) until they are broken. Despite channels often break at pivot 4 or 5, the break should NOT be assumed until it’s proven that it’s broken. That is, if the prices go beyond the trendline by a small amount doesn’t constitute the break of the channel. There are few rules for identifying if the channel has been broken. The first is the broke by 3% or more. The second is the use of the resistance/support and the reversal of its role. That is, resistance becomes support or support becomes resistance. As for profit target rules, it’s usually located at the beginning of the starting channel at the first pivot (pivot 1 in the graph above). Trade Recap Starting on August 8, 2007, Russell 2000 E-Mini Futures reached a resistance area at 883, reversed and made it descent. What follows was a downtrend confined in a parallel channel. The channel formed from August 8 to August 16, 2007, with two pivot highs and two pivot lows forming. Once the second pivot low was formed (point 4 on figure 3), the channel now has two possibilities: bounce and move up to the top of the channel and reverse or continue and break out to the upside. Any aggressive trader would have taken the long from the bounce off the bottom of the channel. This type of entry is a counter-trend trade, having a higher rate of failure than a breakout from the downtrend. This is one setup for the channel. The second and more conservative entry is about to appear. The chart above shows the bounce off the bottom of the channel which was also short-term support (formed the previous week), near 743. It took little time to consolidate and began the move up toward the upper trendline of the channel. After four touches on the channel occurred, the prices broke out to the upside from the channel. As mentioned earlier on the rules used to identify the break of the channel: 3% breakout from the trendline or wait for the prices to use resistance areas as support. In the 3% breakout filter, it’s best for swing trade or longer term. In this case, it’s an intraday trade, 3% (or 22 points) is too large to wait for a confirmation. In this case, a second filter is used to change the resistance level to support. In this case, the upper trendline of the channel will be used to reverse roles.
The target profit is immediately identified, at the beginning (the high) of the channel, at 803.
Almost immediately the same bar that the long was taken, the prices spiked to the profit target. Although it was that it reached quicker than expected, but no complaints are lodged as the exit is taken when the 803 was touched. When it comes to price channels, there are plenty of setups every day, depending on the timeframe. These can be easily identified with patience and practice. Many technical analysts use these for swing trades as well as intraday trades. Discuss this article in the forum. ...thanks
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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Figure 4 Profit target reached
