Channeling Stocks Strategy
The most effective method for trading channeling stocks is to use multiple time frame analysis. In my opinion, only two time frames are necessary, however some traders like to use three.
For this discussion, we'll be using two time frames. Why complicate things if you don't have to? Keep it simple. But first.....lets go over some basics.
WHAT ARE CHANNELING STOCKS AND HOW DO YOU MAKE A CHANNEL?
To make an upward price channel on a stock chart, simply draw a line between two significant price lows. On the diagram below, those points are represented as points 1 and 3.
Then create a parallel line, and draw it from the highest high between points 1 and 3. This is point 2 on the diagram below. Now you have a price channel.
Channeling stocks are stocks that are continuing to respect the support and resistance lines of a particular channel. Who would've guessed that?
Channels can be drawn in different ways, from different points but really, I must say, to draw them perfectly, volume should be used. But, as I mentioned, the stock trading strategies in this section are not my own and are simply remembered from many sources that I've come across. I'm presenting these other stock day trading methods and techniques as idea generating material for my readers.
The strategies that I've mostly used over the years are on this page ==> Day Trading Strategies
Getting back to the channeling stocks strategy, here's how to set it up.
Hourly chart - price only
10 min. chart with Stochastic Indicator
Stochastic Indicator (setting 5,3,5)
CHANNELING STOCKS STRATEGY
The general idea here is to locate stocks that are moving through an existing channel on one time frame and then enter a trade off a lower time frame. That channel can exist on a hourly, daily or a 120 minute time frame. It doesn't matter.
Just understand that once a channel is located on a higher time frame, and price is coming close to the lower channel line, drill down to a lower time frame ( 10 min., 5 min., etc.) and pay attention to price action (and an indicator if you prefer).
By doing this you can find some very nice low risk - high reward trades. Since the width of a channel is much wider on a higher time frame, catching a trade near the lower channel line using a 5 min. or 10 min. chart can really put you into some high reward trades with a very small stop, relative to the potential move.
This channeling stocks technique can be used in two different ways:
1) Wait for price to touch the lower channel -- then trade a bounce off of it using the smaller time frame chart.
2) Wait for price to break out of the channel -- see price fail to breakout -- then trade a move back into the channel using the smaller time frame chart.
Below is an example of #2. A channel has been drawn on an hourly chart of NYT. On Dec 6th, price during the first two hours of the session, broke through the channel's support.
Now lets switch over to NYT's 10 min. chart. The existing channel lines from the hourly chart are now on the 10 min. chart.
The 10 min. chart clearly displays one bar breaking out of the channel and then closing back inside. You can also see that at that time, the stochastic indicator was oversold.
Two bars later, price breaks above the breakout bar and stochastic lines cross. An entry here would clearly represent a low risk - high potential reward trade of more than 5 x STOP.