4 WAYS TO TRADE A CHANNEL

By Galen Woods in Trading Articles on 25 December 2013

Read more about Channel Trading
Do you trade with a channel? There are dozens of channel for trading
including linear regression channel, moving average channel, and trend
line channel.
Regardless of your favorite channel tool, there are 4 ways to trade them.
Lets learn about them to make the most out of your trading channel.
TRADING TRENDS WITH CHANNELS
This is a trend trading strategy. To use this trading method, you must have
a channel that is sloping at a healthy angle to confirm that the market is
trending.
A trend line channel is the perfect tool for this trading method.

<img class="alignnone size-home-top wp-image-2532" alt="Draw trend

line channels to find retracements in trends. Channel also provide good
target objective." src="http://www.tradingsetupsreview.com/wpcontent/uploads/2013/12/Trading-Trends-With-Trendline-Channel750x396.png?cf9b13" width="750" height="396" />
Lets go through this channel trading example.

1.

We drew a trend line with two swing highs. The trend line was
sloping downwards.

2.

Then, we drew a parallel line starting with the swing low to complete
the channel.

3.

Prices went up to test the trend line, which is also at the level of a
previous congestion area. Hence, the context was excellent for a
bear trade, so we went short with the bearish inside bar.

4.

The channel trend line provided the perfect price target for this
trend trade.

We could have taken the short trade using only the trend line. However,
having the channel gave us a clear exit point for this trade.
To learn more about trading trends with trend line channels, read Channel
Surfing: Riding the Waves of Channels to Profitable Trading <img
style="border: none !important; margin: 0px !important;" alt=""
src="http://ir-na.amazon-adsystem.com/e/ir?t=tradseturevi20&l=as2&o=1&a=142083312X" width="1" height="1" border="0" />.
TRADING REVERSALS WITH CHANNELS
When price exceeds the channel trend line, it could be a climatic move,
implying that the trend has exhausted itself. We can then look out for
reversal trades like the one below.

<img class="alignnone size-home-top wp-image-2536" alt="The breakout of the channel trend line got rejected by a bullish outside bar, setting
up a bullish reversal trade." src="http://www.tradingsetupsreview.com/wpcontent/uploads/2013/12/Trading-Reversal-With-Trendline-Channel750x396.png?cf9b13" width="750" height="396" />
Reversal trades are usually low probability trades so we must select only
the best trades. Follow these rules to find the best reversal trades.

Ensure that the channel is going against the trend of the higher
time-frame. Effectively, you are looking for a retracement of a larger,
more powerful trend.

Trade reversals with steep channels. Steep channels are

unsustainable.

Strong rejection of break-out of channel trend line. (like the outside

bar in the example above)

TRADING RANGES WITH CHANNELS

Channels are not just for trending markets. They are also useful in
highlighting range-bound trades.
In horizontal channels, we can trade without directional bias. We can sell
short at the top of the channel and buy at the bottom.

The Gimmee bar trading setup is an example of trading ranges with

channels. However, in the Gimmee bar strategy, the Bollinger Bands acted
as the channel.

<img class="alignnone size-home-top wp-image-2053" alt="Trading

sideways market using Bollinger Bands as a trading channel."
src="http://www.tradingsetupsreview.com/wpcontent/uploads/2012/05/Gimmee-Bar-Winning-Trade-750x396.png?
cf9b13" width="750" height="396" />
Read our review of the Gimmee bar trading setup to learn more.
TRADING BREAK-OUTS WITH CHANNELS
The earlier strategies assume that the channel will contain price action
and seek to buy low, sell high. What if this assumption fail?
Then, we might have a break-out trading setup that often offers quick
profits. However, judging which break-outs are valid is an art that is hard
to master.

Pay attention to volume. Valid breakouts are strong with increased

volume.

Look out for break-out bars with above average bar range. (Read
Yum-Yum continuation pattern.)

For trading strategies that finds break-outs with channels, take a look at:

Quick Trade using Linear Regression Channel A classic example of

a break-out trade.

A Simple Day Trading Strategy It uses MACD to confirm the

breakout of Bollinger Bands.

MAKE THE MOST OUT OF TRADING CHANNELS

Channels are powerful trading tools that highlight trading opportunities for
all 4 types of basic trade setups.
However, for some traders, having too much trading options is a
drawback. They look for trading setups everywhere. They take a
retracement trade, and then a reversal trade, and then think that a breakout is impending. All these within a few minutes. They are overtrading.
A solution is to draw a larger channel to analyze the larger price context
and only take trades in its direction. For indicator-type channels, you can
increase both the look-back period setting and the deviation setting to
create a larger channel to contain long-term price action.

CHANNELING: CHARTING A PATH TO SUCCESS

By Justin Kuepper AAA |
Channel trading is a powerful yet often overlooked form of trading that
capitalizes on the tendencies of markets to trend. It combines several
forms of technical analysis to provide traders with precise points from
which to buy and sell, put stop-loss and take-profit levels and much more!
This article will show you how to create and effectively trade these
amazing instruments.
SEE: Technical Analysis
Channel Characteristics
In the context of technical analysis, a channel is defined as the area
between two parallel trendlines and is often taken as a measure of a
trading range. The upper trendline connects price peaks (highs) or closes,
and the lower trendline connects lows or closes. An example of a channel
is shown below. Breakout points in channels indicate bullish (on upward
trends) or bearish (on downward trends) signals.

Channels are useful for short-to medium-term trading - not long-term

trading or investing. The technique often works best on stocks with a
medium amount of volatility. Remember, the volatility determines your
profit per trade. Channeling also tends to work best when the technique is
combined with other forms of technical analysis, at which we take a closer
look below.
Finding an Equity
Not all equities can utilize this technique as it requires that the underlying
equity has an existing channel in its chart. Generally, a channel consisting
of four contact points is necessary for the channel to be considered
"tradeable." There are three ways to locate an equity to which this
strategy can be applied:
1. Manually look through charts to locate channel patterns.

2. Utilize software or a service that automatically recognizes channel

patterns.
3. Subscribe to a company that provides you with a list of equities to
which this technique can be applied.
Creating a Channel
Channels are relatively easy to create using these four simple steps:
1. Locate a relative high and a relative low in the past from which to
begin the channel.
2. Locate another subsequent high and low that follows one of the
three following patterns (see table below):
a.Ascending channel - higher high and higher low.
b.Descending channel - lower low and lower high.
c.Horizontal channel - horizontal highs and lows.
3. Draw two trend lines - one connecting the two highs, and one
connecting the two lows. Note that these two lines should be near
parallel.
4. These two lines form your basic channel after there are at least two
contact points with the upper channel and two with the lower
channel. More contact points enhance the reliability of the channel.

Trading the Channel

Channels provide a clear, systematic way to trade. In fact, these simple

instruments can show you when to buy and sell, where to place your stoploss and take-profit points, how to determine the reliability of the trade
and how long you should expect the trade to take! Let's look at how these
can be done.
Locating Buy and Sell Points
Channels help locate optimal buying and selling points. Here are the
standard channel trading rules:

When the price hits the top of the channel, sell your existing
position and/or take a short position.

When the price is in the middle of the channel, hold.

When the price hits the bottom of the channel, add to your existing
position, cover your short and/or buy.

Two exceptions to these rules:

1.
1. If the price breaks through the top or bottom of the channel,
then the channel play ends until a new channel is established.
2. If the price drifts between the channels for a prolonged period
of time, a new narrower channel may be established.
There may be times when other forms of technical analysis are needed to
enhance the accuracy of the channel plays, and verify the overall strength
of the channel. Using other techniques in conjunction with channeling can
also help you avoid the side effects of the two exceptions listed above. A
few useful ones to keep in mind are:

Moving average convergence divergence - These can be used to

confirm channel movements, especially after a contact is made.

Stochastics - These are useful to confirm channel movements.

Volume - Analyzing volume ratios can also help you determine the
strengths of different channel movements, which determine the
overall channel strength.

Short-term moving averages - These can provide you with a shortterm outlook on a channel play. They are most useful after a contact
is made to confirm the change in direction.

Candlestick patterns - These are useful for spotting channel

breakouts.

Determining Stop-Loss and Take-Profit Levels

Channels provide built-in money-management capabilities in the form of
stop-loss and take-profit points. Here are the standard rules for
determining these points:

If you have bought at the bottom of the channel, set a (moving)

take-profit point at the top of the channel. Also, set a (moving) stoploss point slightly below the bottom of the channel, allowing room
for regular volatility (taking the beta into consideration).

If you have taken a short position at the top of the channel, set a
(moving) take-profit point at the bottom of the channel. Also, set a
(moving) stop-loss slightly above the top of the channel, allowing
room for regular volatility (taking the beta into consideration).

Determining Trade Reliability

Channels provide the ability to determine how likely your trade is to be
successful. This is done through something known as confirmations.
Confirmations represent the number of times the price has rebounded
from the top or bottom of the channel - in essence confirming the
accuracy of the channel. Here are the important confirmation levels to
remember:

1-2:Weak channel (non-tradeable).

3-4: Adequate channel (tradeable).

5-6: Strong channel (reliable).

6+: Very strong channel (very reliable).

Estimating Trade Length

The amount of time a trade takes to reach a sell point from a buy point

can also be calculated using channels. This is done by recording the

amount of time it has taken for trades to execute in the past, then
averaging the amount of time for the future. This strategy relies on the
theory that channel price movements tend to be nearly equal in time and
price.
Conclusion
Channels provide one of the most accurate methods from which to trade
in any market. By "encasing" an equities price movement into two parallel
trend lines, this simple chart can provide the exact points from which to
buy and sell, create stop-loss and take-profit points, check channel
strength and even estimate how long the trade will take. This technique is
a valuable asset to any trader.

NR7 TRADING STRATEGY

By Galen Woods in Trading Setups on 16 January 2014
Read more about Bar Patterns
The quiet period before the next explosive market move is like the calm
before the storm. NR7 helps us to find the calm so that we can prepare
and profit from the impending storm.
NR7 means narrow bar 7. It is a bar that has a smaller range than the six
bars before it. It is a range contraction that precedes range expansion.
In our trading strategy, we add a simple trend rule to find low risk trend
trades.
TRADING RULES NR7 TRADING STRATEGY
Long Trading Strategy
1.

Past 7 bars are completely above the 20-period EMA

2.

Buy on break of high of NR7 bar

Short Trading Strategy

1.

Past 7 bars are completely below the 20-period EMA

2.

Sell on break of low of NR7 bar

NR7 TRADING EXAMPLES

Winning Trade Bearish NR7

<img class="alignnone size-home-top wp-image-3070" alt="NR7 Trading

Strategy Winning Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2014/01/NR7-Trading-Strategy-Winning-Trade750x396.png?cf9b13" width="750" height="396" />
This is a 3-minute chart of CL futures on NYMEX. The orange line is the 20period EMA. The NR7 bars have a yellow background.
1.

Price swung down from above the EMA with eight consecutive
bearish bars.

2.

The seven bars that defined the NR7 bar were all below the EMA,
showing that the bearish momentum held up. Although the NR7 bar
closed higher than its open, it formed a micro triple top with the two
bars before it. After the low of the NR7 bar broke, we went short.

3.

Price came back up to test the break-even level of the trade.

However, following a failed bull break-out of the doji NR7, prices
plummeted.

The doji NR7 is also a great example to warn us against using NR7 to
trade reversals without confirmation from other analysis.

Losing Trade Bearish NR7

<img class="alignnone size-home-top wp-image-3074" alt="NR7 Trading

Strategy Losing Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2014/01/NR7-Trading-Strategy-Losing-Trade750x396.png?cf9b13" width="750" height="396" />
This is another 3-minute chart of CL futures. In this example, the NR7
trade experienced whipsaws.
1.

The seven bars leading up to the NR7 bar were all below the EMA.
Despite the four bullish bars in the retracement, price could not
reach the EMA.

2.

As price broke the low of the second NR7 bar, we went short.
However, the consecutive NR7 bars was a hint of the tight congestion
that followed.

3.

Price hit our stop-loss at the high of the NR7 bar. It was a false
break-out that reversed and continued the bear trend. Re-entry was a
valid option as price stayed below the EMA throughout the
retracement and our bearish outlook was not compromised.

REVIEW NR7 TRADING STRATEGY

Toby Crabel studied the NR7 pattern together with the NR4/ID trading
setup. Both patterns are popular trading tools found in many trading
strategies.
(Read: Day Trading with Short Term Price Patterns and Opening Range
Breakout)
In this NR7 trading strategy, we looked for markets with a strong trend
and used NR7 as a low risk entry point to join the trend.
Do not follow the trading rules mechanically. Some NR7 bars appear at the
high of a bull trend or the low of a bear trend. These setups are not the
target of our trading strategy. Wait for a real pullback to enter.
Be very careful when you see multiple NR7 bars. Narrow range bars in
proximity are a sign of price congestion in which NR7 patterns are less
reliable.
Remember to follow the path of least resistance. The best NR7 bars occur
when price is moving against the path of least resistance.

QUICK TRADE USING LINEAR REGRESSION CHANNEL

By Galen Woods in Trading Setups on 17 June 2013
Read more about Channel Trading, Options Trading
Quick Trade Using Linear Regression Channel is a trading method from
Bernie Schaeffers book, The Option Advisor: Wealth-Building Techniques
Using Equity & Index Options, which is an excellent introduction to
options trading.
It uses linear regression channels to identify trends that are poised to
accelerate. Read this for more ways to trade using a channel.
To get a linear regression channel, draw a best fit line from a swing point
to another, and extend the channel lines 2 standard deviations away on
each side of the best fit line. Most technical analysis charting software
comes with a linear regression channel drawing tool.
We used the time exit rule of 7 days as suggested by Bernie Schaeffer.
RULES FOR LONG QUICK TRADE
1.

Draw a linear regression channel connecting two significant swing

lows

2.

Prices close above the channel for two consecutive days

3.

Buy with limit order upon retest of top channel line

4.

Exit in 7 days

RULES FOR SHORT QUICK TRADE

1.

Draw a linear regression channel connecting two significant swing

highs

2.

Prices close below the channel for two consecutive days

3.

Buy with limit order upon retest of bottom channel line

4.

Exit in 7 days

WINNING TRADE QUICK TRADE

<img class=" wp-image-688 " alt="Quick Trade Winning Trade Using

Linear Regression Channel" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2013/06/Quick-Trade-Winning-Trade-1024x537.png?
cf9b13" width="750" height="393" />
Quick Trade Winning Trade
This is the daily chart of IBM. IBM is an optionable stock so calls can be
purchased. Using the Quick Trade using linear regression channel, we
would have entered the trade as prices fell back to the top channel line as
shown by the green arrow. Exiting in 7 days (red arrow) would have given
our call options a good return.
Lets take a closer look at this winning trade example.
1.

For the linear regression channel, I chose a major swing low as

the starting point, and adjust the ending point of the channel as
new swing lows formed. Hence, the linear regression channel
changes as price action unfolds, making this strategy a dynamic
one.

2.

In the bounce up from the bottom of the channel, we had a

breakaway gap, which gave support to our long trade.

3.

The two consecutive closes above the channel is an important filter

to avoid false breakouts.

LOSING TRADE QUICK TRADE

<img class=" wp-image-700 " alt="Quick Trade Using Linear Regression

Channel Losing Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2013/06/Quick-Trade-Losing-Trade-1024x526.png?cf9b13"
width="750" height="393" />
Quick Trade Losing Trade
In this daily chart, Altera Corp. (ALTR) reversed into an upwards trend.
Using the turning point to start our trade using linear regression channel,
we got a Quick Trade signal as shown by the green arrow. However, 7 days
later, the trade was closed with a loss.
The preceding price action gave clear warning signs against taking
this Quick Trade.

1.

Prices gapped up but stalled, showing a lack of bullishness.

2.

Prices broke out of the linear regression channel into a resistance

zone set by a prior gap. Before this resistance is broken, long
trades are a gamble.

3.

Our channel was well-drawn as it contained prices well despite

the failed trade. We could have relied on the bounce up from the
lower channel line to exit at a better price. However, it is crucial that
we respect our time stop of 7 days when trading options, as options
value decay with time.

REVIEW QUICK TRADE USING LINEAR REGRESSION CHANNEL

Quick Trade using linear regression channel combines the math behind
best fit lines with the traders choice of swing points.
Well-drawn regression channels have a high probability of success.
Always choose a major swing low/high to start the channel so that
it contains the main trend.
While Quick Trade is an effective trading strategy, opportunities can be
limited. Moreover, due to the discretion needed to choose swing points, it
is not easy to scan automatically for Quick Trade setups. Be patient and
wait for the best trade. Given the leverage in options trading, the wait
is worth it.
The idea of having a time stop for an options trading strategy is great.
Although buying options has limited loss, traders should not hold on to
their calls and puts although their edge has already eroded.
Quick Trades tend to occur together with the Bollinger Squeeze. It is not
surprising as both trading setups are trying to find explosive moves.
If you like trading with channels, take a look at Jake Bernsteins moving
average channel day trading strategy.

MOVING AVERAGE CHANNEL DAY TRADE

By Galen Woods in Trading Setups on 26 February 2012
Read more about Channel Trading, Day Trading, Moving Average
This day trading setup by Jake Bernstein uses a moving average channel
to figure out trend and key support and resistance levels. For our review,
we will build a moving average channel with a 20-period SMA of highs and
lows.
(Read: Displaced Moving Average Channel Trading Strategy)
RULES FOR LONG DAY TRADE
1.

Wait for two consecutive bars to move entirely above the high of the
channel

2.

Buy as price tests the 20 SMA of lows (more aggressive traders can
buy on test of 20 SMA of highs)

RULES FOR SHORT DAY TRADE

1.

Wait for two consecutive bars to move entirely below the low of the
channel

2.

Short as price tests the 20 SMA of highs (more aggressive traders

can sell on test of 20 SMA of lows)

WINNING TRADE MOVING AVERAGE CHANNEL DAY TRADE

<img class="size-full wp-image-1328 " alt="Moving Average Channel Day

Trade Winning Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2012/02/Moving-Average-Channel-Day-Trade-WinningTrade.jpg?cf9b13" width="896" height="659" />
Moving Average Channel Day Trade Winning Trade
This chart shows a 5-minute chart of ES, the E-mini S&P futures. The two
circled bars went completely below the moving average channel and
confirmed the down trend.

For a conservative trade, we placed a sell limit order at the top of the
channel. As prices spiked up to hit the channel top, we entered a short
position at 1347.25. Prices continued down until 1338 and gave a profit
potential of 9.25 points, while risking almost nothing as the trade went in
our direction immediately after we entered.
In this example, the moving average channel highlighted the strong bear
spike as price moved beyond the channel. The top channel line gave
excellent resistance and minimized our risk. Even if we entered as the
bearish outside bar broke the low of the previous bar, it was still a good
entry with little adverse movement.
LOSING TRADE MOVING AVERAGE CHANNEL DAY TRADE

<img class="size-full wp-image-1329 " alt="Moving Average Channel Day

Trade Losing Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2012/02/Moving-Average-Channel-Day-Trade-LosingTrade.jpg?cf9b13" width="896" height="659" />
Moving Average Channel Day Trade Losing Trade
Here, similarly, we had two bars entirely below the channel to confirm the
down trend. We then shorted with a limit order at around 1356.75.
However, the trade went against us almost immediately and forced out
any reasonable stop-loss order.

There were warning signs against taking this trade.

First, the two circled bars were not exactly in free fall with the first bar
being a doji and the second bar with a long bottom tail.
Next, right after channel break-out, there was a classic double bottom
followed by four consecutive bullish bars. Following that, you could notice
that each bearish bar was followed by either a doji or a bullish bar,
suggesting that the bears were giving up the fight.
Given this bullish context, we should not take a short trade simply
because of the rigid trading rules.
REVIEW MOVING AVERAGE CHANNEL DAY TRADE
This trade setup gives the traditional moving average a useful twist. Using
the highs and lows to form moving averages is a sound concept as they
are the natural support and resistance levels of each bar. Hence, it
behaves nicely as support and resistance.
Requiring two bars to go beyond the channel helps to find spikes and
avoid ranging conditions.
A potential pitfall of using this trading setup is over-reliance on the moving
average channel for support and resistance. This may cause traders to
overlook the real price action unfolding before them.

ANDREWS PITCHFORK TRADING STRATEGY

By Galen Woods in Trading Setups on 27 February 2014
Read more about Channel Trading, Trading Trend
Alan Andrews Pitchfork is catchy. It catches your attention with its
unusual name and its striking pitchfork appearance. It also catches trends
with a channel.
Essentially, Andrews Pitchfork is a tool for drawing price channels. While
two lines surrounding price are usually enough to draw a channel, the
Pitchfork has an extra line. It is the median line or the handle of the
Pitchfork.
The median line is central to this trading method. This is why Andrews
Pitchfork is also known as the Median Line Method.
HOW TO DRAW THE ANDREWS PITCHFORK

<img class="alignnone size-home-top wp-image-3639" alt="How To Draw

Andrew's Pitchfork" src="http://www.tradingsetupsreview.com/wp-

content/uploads/2014/02/How-To-Draw-Andrews-Pitchfork-750x396.png?
cf9b13" width="750" height="396" />
There are three steps to drawing a Pitchfork.
Step One Pivot Points
You need three points for a Pitchfork.
For a bull channel, label:

A major pivot low as point A;

A subsequent higher pivot high as point B; and

The following pivot low as point C.

For a bear channel, label:

A major pivot high as point A;

A subsequent lower pivot low as point B; and

The following pivot high as point C.

Step Two Median Line

Draw a line passing through point A. and the mid-point of point B and C.
This is the median line.
Step Three Channel Lines
Project parallel lines to both sides of the median line to form the channel.
One line should pass through point B, and the other through point C. The
top line is the upper median line and the bottom line is the lower median
line.
The median line determines the slope of the channel. This is in stark
contrast to the normal trend line channel method in which the angle
depends on the trend line.

Read: 4 Ways to Trade a Channel

In charting packages with an in-built Pitchfork drawing tool, selecting the
three pivot points is enough for drawing the Pitchfork.
TRADING RULES ANDREWS PITCHFORK TRADING STRATEGY
There are many ways to trade using Andrews Pitchfork but the basic idea
is that price will oscillate around the median line. In this version, we will
focus on trading the first re-test of the limiting median line.
Long Trade
1.

Draw a bull channel with Andrews Pitchfork

2.

Wait for price to fall and test the lower median line

3.

No bar high should be lower than the lower median line

4.

Buy a tick above the high of a bull bar at the lower median line

Short Trade
1.

Draw a bear channel with Andrews Pitchfork

2.

Wait for price to rise and test the upper median line

3.

No bar low should be higher than the upper median line

4.

Buy a tick below the low of a bear bar at the upper median line

ANDREWS PITCHFORK TRADING EXAMPLES

Winning Trade Short SPY Weekly

<img class="alignnone size-home-top wp-image-3649" alt="Andrew's

Pitchfork Winning Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2014/02/Andrews-Pitchfork-Winning-Trade-750x396.png?
cf9b13" width="750" height="396" />
This SPY weekly chart shows one of the most impressive Pitchfork in the
past decade. After all, it caught a huge chunk of the market plunge in
2008/2009.
1.

After making a new low in the downwards trend, the market

bounced up to test the upper median line. The resistance was clear
as a bearish outside bar formed at the line. This bar was also our
signal to go short.

2.

These four points are possible targets for the bear market. In fact,
the last target caught the exact bottom of the crisis.

3.

Price rose strongly and broke out of the upper median line. This
break-out warned us that the market was not simply having a rest in
a down trend. A recovery was underway.

Losing Trade Short EUR/USD Daily

<img class="alignnone size-home-top wp-image-3648" alt="Andrew's

Pitchfork Losing Trade" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2014/02/Andrews-Pitchfork-Losing-Trade-750x396.png?
cf9b13" width="750" height="396" />
This EUR/USD daily chart shows another bearish Pitchfork.
1.

Price fell and found resistance at the median line. It bounced up to

the upper median line which resisted it. We entered short with the
first bearish bar that overlapped with the line.

2.

Although the trade achieved more than 1:1 reward to risk ratio, we
consider this trade as a failure because it was a trend continuation
trade. Hence, the most conservative target was the last extreme of
the down trend. Price rose up above our pattern stop at the high of
our signal bar before hitting this conservative target.

3.

After the trend resumed, prices tangled with the median line,
showing that this centerpiece was significant.

The timing of this trade was not perfect, but it was not a bad trade. In
fact, this chart gives us a great opportunity to introduce sliding
parallels.

Sliding parallels are added parallel lines which also act as channel lines.
The first sliding parallel provided excellent resistance in this down trend.

<img class="alignnone size-home-top wp-image-3652" alt="Andrew's

Pitchfork Sliding Parallel" src="http://www.tradingsetupsreview.com/wpcontent/uploads/2014/02/Andrews-Pitchfork-Sliding-Parallel-750x396.png?
cf9b13" width="750" height="396" />
This is a textbook example. In ongoing chart analysis, you will have many
sliding parallels. (Just keep pushing them to the right by the same
distance.)
It is not always clear which sliding parallel will be effective. Moreover, if
you have too many sliding parallels, you might miss signals of a reversal.
REVIEW ANDREWS PITCHFORK TRADING STRATEGY
Andrews Pitchfork is a unique and reliable tool. The median line provides
a different market geometry perspective. The trick lies in picking the right
pivots.

Pick the major pivots. Ensure that the resulting channel is wide. Wide
channels do better and offers a healthier reward to risk ratio.
When drawing Pitchforks, there are two common pitfalls.
The first is selecting the last pivot (point C) too soon. Exercise patience
and let price action confirms the pivot as a major swing point before
including it in your Pitchfork. If not, expect more false signals.
The second problem is with the person with too many Pitchforks. Some
traders are so excited with this new toy that they draw Pitchforks all over
the chart. Its confusing and not helpful.
The basic Pitchfork we used is just a part of a massive trading approach
that includes sliding parallels, trigger lines, multiple Pitchforks, and
variants like Schiff. Most online materials only cover the basic Pitchfork.

CHANNELING: CHARTING A PATH TO SUCCESS

By Justin Kuepper AAA |
Channel trading is a powerful yet often overlooked form of trading that
capitalizes on the tendencies of markets to trend. It combines several
forms of technical analysis to provide traders with precise points from
which to buy and sell, put stop-loss and take-profit levels and much more!
This article will show you how to create and effectively trade these
amazing instruments.
SEE: Technical Analysis
Channel Characteristics
In the context of technical analysis, a channel is defined as the area
between two parallel trendlines and is often taken as a measure of a
trading range. The upper trendline connects price peaks (highs) or closes,
and the lower trendline connects lows or closes. An example of a channel
is shown below. Breakout points in channels indicate bullish (on upward
trends) or bearish (on downward trends) signals.

Channels are useful for short-to medium-term trading - not long-term

trading or investing. The technique often works best on stocks with a
medium amount of volatility. Remember, the volatility determines your
profit per trade. Channeling also tends to work best when the technique is
combined with other forms of technical analysis, at which we take a closer
look below.
Finding an Equity
Not all equities can utilize this technique as it requires that the underlying
equity has an existing channel in its chart. Generally, a channel consisting
of four contact points is necessary for the channel to be considered
"tradeable." There are three ways to locate an equity to which this
strategy can be applied:
1. Manually look through charts to locate channel patterns.

2. Utilize software or a service that automatically recognizes channel

patterns.
3. Subscribe to a company that provides you with a list of equities to
which this technique can be applied.
Creating a Channel
Channels are relatively easy to create using these four simple steps:
1. Locate a relative high and a relative low in the past from which to
begin the channel.
2. Locate another subsequent high and low that follows one of the
three following patterns (see table below):
a.Ascending channel - higher high and higher low.
b.Descending channel - lower low and lower high.
c.Horizontal channel - horizontal highs and lows.
3. Draw two trend lines - one connecting the two highs, and one
connecting the two lows. Note that these two lines should be near
parallel.
4. These two lines form your basic channel after there are at least two
contact points with the upper channel and two with the lower
channel. More contact points enhance the reliability of the channel.

Trading the Channel

Channels provide a clear, systematic way to trade. In fact, these simple

instruments can show you when to buy and sell, where to place your stoploss and take-profit points, how to determine the reliability of the trade
and how long you should expect the trade to take! Let's look at how these
can be done.
Locating Buy and Sell Points
Channels help locate optimal buying and selling points. Here are the
standard channel trading rules:

When the price hits the top of the channel, sell your existing
position and/or take a short position.

When the price is in the middle of the channel, hold.

When the price hits the bottom of the channel, add to your existing
position, cover your short and/or buy.

Two exceptions to these rules:

1.
1. If the price breaks through the top or bottom of the channel,
then the channel play ends until a new channel is established.
2. If the price drifts between the channels for a prolonged period
of time, a new narrower channel may be established.
There may be times when other forms of technical analysis are needed to
enhance the accuracy of the channel plays, and verify the overall strength
of the channel. Using other techniques in conjunction with channeling can
also help you avoid the side effects of the two exceptions listed above. A
few useful ones to keep in mind are:

Moving average convergence divergence - These can be used to

confirm channel movements, especially after a contact is made.

Stochastics - These are useful to confirm channel movements.

Volume - Analyzing volume ratios can also help you determine the
strengths of different channel movements, which determine the
overall channel strength.

Short-term moving averages - These can provide you with a shortterm outlook on a channel play. They are most useful after a contact
is made to confirm the change in direction.

Candlestick patterns - These are useful for spotting channel

breakouts.

Determining Stop-Loss and Take-Profit Levels

Channels provide built-in money-management capabilities in the form of
stop-loss and take-profit points. Here are the standard rules for
determining these points:

If you have bought at the bottom of the channel, set a (moving)

take-profit point at the top of the channel. Also, set a (moving) stoploss point slightly below the bottom of the channel, allowing room
for regular volatility (taking the beta into consideration).

If you have taken a short position at the top of the channel, set a
(moving) take-profit point at the bottom of the channel. Also, set a
(moving) stop-loss slightly above the top of the channel, allowing
room for regular volatility (taking the beta into consideration).

Determining Trade Reliability

Channels provide the ability to determine how likely your trade is to be
successful. This is done through something known as confirmations.
Confirmations represent the number of times the price has rebounded
from the top or bottom of the channel - in essence confirming the
accuracy of the channel. Here are the important confirmation levels to
remember:

1-2:Weak channel (non-tradeable).

3-4: Adequate channel (tradeable).

5-6: Strong channel (reliable).

6+: Very strong channel (very reliable).

Estimating Trade Length

The amount of time a trade takes to reach a sell point from a buy point

can also be calculated using channels. This is done by recording the

amount of time it has taken for trades to execute in the past, then
averaging the amount of time for the future. This strategy relies on the
theory that channel price movements tend to be nearly equal in time and
price.
Conclusion
Channels provide one of the most accurate methods from which to trade
in any market. By "encasing" an equities price movement into two parallel
trend lines, this simple chart can provide the exact points from which to
buy and sell, create stop-loss and take-profit points, check channel
strength and even estimate how long the trade will take. This technique is
a valuable asset to any trader.

THE 'CHANNEL BOUNCE' TRADING STRATEGY, EXPLAINEDADD TO ...

CORY MITCHELL - INVESTOPEDIA
Special to The Globe and Mail
PublishedThursday, Apr. 10 2014, 4:19 PM EDT
Last updatedThursday, Apr. 10 2014, 4:35 PM EDT

Comments

AA

The S&P 500 SPDR is within a broadening wedge formation since the start
of March, and bounced off the lows of that formation on April 8. A
continued rise in the index toward the highs at $187.70 will favor these
stocks bouncing off their own channel support lines. These four stocks are
all moving within strong trend channels, and currently near channel
support. The support line provides a potential buy area, with the
resistance line top of the channel providing a target.
More Related to this Story

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Using the Coppock Curve to Generate Stock Trade Signals

Which Direction Is The Market Heading?

Multimedia
Brocade Communications Systems Inc. channel bounce chart

Multimedia
Covidien channel bounce chart

Multimedia
Qualcomm Inc. channel bounce chart

Multimedia
Consol Energy Inc. channel bounce chart
The targets provided below are based on the current top of the channel.
Over time the channel is rising, so if these trades last weeks or months,
the targets will slowly creep up as the upper channel line rises.
The current trend channel in Brocade Communications has been in place
since December. The stock dipped below $10 briefly on April 7, which was
a test of the channel bottom. So far the channel has held, providing a

buying opportunity between $10 and $10.30. A stop can be placed below
$9.85, with an upside target near the channel top at $11.
Covidien has been moving in a $5 channel (approximately) since October.
The stock is currently falling aggressively toward the lower channel line; if
that selling strength continues, buying isnt recommended. Though, if the
stock slows its decent between $70 and $69, that is a different story. A
pause and then a bounce near the trendline is ideal, providing an entry
between $71 and $70 with a stop below $69. Target is the upper portion of
the channel, between $74 and $74.75.
One thing to be wary of is that the channel is slightly converging, in a
wedge pattern. Wedges are often followed by a reversal. A strong break
below $68.50 indicates this scenario could be underway.
Qualcomm is currently near the middle of its channel, but short-term
momentum is down, signalling the price could soon test the channel
bottom. If the price slows and reverses between $76.50 and $75.75, buys
can be initiated in that area or slightly above. A stop can be placed just
below the newly formed bottom (yet to be determined) or at $75.50.
Target is the top of the channel, which is currently near $81.75.
The trend channel in Consol Energy is less angled than the former stocks
mentioned, indicating a bit more hesitancy on the part of the buyers. That
said, the stock has been swinging well within the channel. Both the upper
and lower channel lines have been penetrated a number of times. That
will make the entry and exit points within stock more subjective, as the
entry and exit areas will be slightly larger than normal.
Currently, the stock is near the middle of the channel, so it may take some
time before an entry signal occurs. The entry area is currently between
$39.50 and $38.50, but that entry area will rise slowly over time. A stop
can be placed below $38.20, or a new low once it develops (yet to be
determined). Target area is $42.10 to $42.65.

The bottom line

Trend channels provide a visually appealing way to spot trading
opportunities. The structure of the pattern highlights the buying area
(support), the target area (resistance) and stops are placed just outside
the pattern. Ideally let the price pause and bounce at the lower trendline.
This shows the selling has slowed and buyers are stepping back in. If the
price bounces too aggressively off the channel bottomsay to the middle
of the channelleave the trade alone, as the risk is now likely to exceed
the diminished reward. The goal is to get in near the channel bottom, and
ride the wave to the top.

BETWEEN EXTREMES: TRADING WITH CHANNELS

By Bramesh Bhandari
March 26, 2013 Reprints
Channels are an important technical condition prevalent on almost all
price charts on all time frames. Traders use these simple formations to
identify profitable trade setups on both the long and short sides. If drawn
and analyzed correctly, price channels can provide precise entry, exit,
stop-loss and profit-taking levels for all types of traders in all markets.
However, price channels have their limits, and those who put too much
faith in them can get burned.
A price channel combines an existing trendline with a second, parallel
trendline so that when the lines are taken together, they fully contain the
price fluctuations in the current leg of the move. The upper trendline
connects significant highs of the move, and the lower trendline connects
the lows of the move. These trendline levels represent areas where key
demand (support) and supply (resistance) exist. An assets price will
oscillate between these levels the upper and lower trendlines helping
traders position their entries and risk-aware exits.
All else equal, buy entries tend to be more profitable when placed at the
lower end of the channel, and sell entries tend to be more profitable when
placed at the upper end. Of course, that thinking assumes the channel will
hold. Likewise, traders can set stop-loss and profit-target orders in the
vicinity of these established highs and lows to protect the bottom line or
get the most out of a position.

Stepping higher (above) shows a typical price channel in the S&P 500
stock index. After setting a low of 1266 on June 8, 2012, the S&P 500
generated a series of higher highs and higher lows the classic definition
of an uptrend. Although relatively short in duration, this is a typical
example of how price trends play out, with surges and retracements that,
when taken together, result in a net move in a predominant direction.
What also is clear is that channels arent always picture perfect. Highs and
lows are fluid, and traders must be alert and flexible as channels develop.
Line drawings
Price channels are simply lines on a chart. They are easy to draw, but its
important to approach the process in a systematic manner:

Identify a consecutive swing high and swing low pair. A swing price
is simply a high (or low) that is surrounded by a defined number of lower
highs (or higher lows) on either side.

If price is rising it is in an uptrend draw a line to the right off

the swing high, connecting subsequent swing highs. This is the resistance
line.

Alternatively, if price is falling it is in a downtrend draw a line

to the right off the swing low, connecting subsequent swing lows. This is
the support line.

After you have drawn the resistance or support line, draw a second
line that connects the opposite extreme of the moves within the trend.
Ideally, this line will be parallel to the resistance or support line that
defines the rate of change for the move.
Like trendlines, the vast majority of channels rise or fall, identifying
uptrends or downtrends. As you might expect, uptrend channels are
considered bullish and downtrend channels are considered bearish.
A driving philosophy of channel trading is that the pattern of consistent
highs and lows will persist. Per this assumption, buy when price nears the
rising support line in an uptrend and book profits when price approaches
the rising resistance line (see On the up and up, below). A common riskmanagement practice in this bullish scenario is to set a stop-loss order
slightly below the support line. More risk-seeking traders also can trade
against the trend selling when price bounces off the resistance line in
an uptrend or buying when prices reacts off the support line in a
downtrend.

This trading strategy is simply flipped on its head for a downtrend

channel. Sell when price nears the falling resistance line in the downtrend
and liquidate the trade when price approaches the falling support line. The
stop loss would be placed just above the resistance point at trade
initiation. Risk-seeking traders also can elect to establish a long position
at support.
Channels dont always rise or fall. They also can contain sideways moving
markets (see Swinging sideways, below). Although advanced traders
often will sell options during such periods to take advantage of the
markets reluctance to establish a defined trend, traditional traders should
consider sitting on the sidelines as the opportunities for big moves are
muted.

Rules to trade by
Although channel analysis helps investors take advantage of price
oscillations, always remember this key rule: When the channel is broken,
its done. Although there are certainly numerous cases of temporary
violations of channel support and resistance levels, dont assume this will
happen. Betting against the break and being wrong can be quite costly.
The channel can re-establish itself, of course, but make no assumptions.
Wait for the swing highs and lows to re-develop and trade off them.
However, that doesnt mean a break (up or down) in the trendline is not a
trading opportunity. When the support line is broken in an uptrend or the
resistance line is broken in a downtrend, it often signifies that the
markets expectation about the stock has changed. This break therefore
can be used to generate a new bullish or bearish bias in the stock. Any
decisive break in the downtrend line is a clear buy signal. Similarly, any
decisive break in the uptrend line is a clear sell signal. In both cases, the
main trendline value should be used as the stop loss.

A break in the opposite channel line, on the other hand, indicates that the
trend is becoming stronger. Traders might consider taking a fresh long
position to participate in the initial euphoria that often follows such a
break, or they can wait for a pullback and establish a new long at a more
favorable price. In either case, keep in mind that breaks are typically
volatile periods, and may be best left to nimble traders with seasoned
risk-control techniques.
An early signal of a coming break might be given when prices fail to reach
a channel line, turning in the middle of the channels width. Such returnline failure indicates that the channel is weakening and investors must be
cautious with their trades when prices revisit the original trendline.
Channels also work well with complementary indicators. Moving averages,
which depict the direction and extent of a trend, and oscillators, which can
reveal intricacies of how quickly, slowly, strongly or weakly prices are
moving within a channel, both are particularly helpful.
Channels are useful for short- to medium-term trading. They are not longterm trading tools. They also work particularly well on stocks with a
medium amount of volatility. However, even long-term traders should be
aware of channel formations. Any violation in this simple price pattern can
foretell significant shifts in market sentiment and profit opportunities
going forward.

ESIGNAL LINEAR REGRESSION CHANNEL TRADING STRATEGY

Linear Regression is an eSignal charting tool using the least-squares fit
mathematical method to statistically plot a "best-fit" straight line through
the exact middle of the prices over a given period of time. A Linear
Regression trendline shows where an equilibrium or mid-point price exists.
General Overview of the Linear Regression Tool
Linear Regression identifies when prices overextend from a median point.
The distance a price migrates above or below a linear regression line
indicates the extreme buying or selling perspective from the average
point.
The slope of the line is called the midpoint or median line. The midpoint or
slope of a line is determined by the calculation method. In eSignal, the
"close" of a data bar is the default value used for the linear regression
calculation.
Linear Regression Channels are parallel lines that are a standard deviation
away from the linear regression line on either side of it. These lines are
also called confidence bands. They act as support and resistance lines.
Statistically, linear regression channel lines should contain price
movement. The percentage of price containment depends on the standard
deviation used. Prices may extend outside the channel lines for a brief
time. However, if they remain outside the channel, it suggests that, either
an existing trend is accelerating or a possible reversal in trend is growing.
The space inside the channel is where the equilibrium exists, where price
may deviate from the linear regression line yet stay within the existing
overall trend.

Setting Standard Deviations

Trading effectively using Linear Regression requires setting appropriate
standard deviations. Use parallel lines as support and resistance
confidence bands spaced equally on either side of the regression line.
Standard deviation settings vary based on the slope of the existing trend.
Experimentation suggests that a standard deviation setting of 1 is too
tight for trading in normal conditions, and a setting of between 2 to 3 is
effective. A setting of 5 can be used in extreme range scenarios.
In addition, the number of bars used in a calculation also determines how
well the Linear Regression "fits" the immediate price trend pattern. The
more data bars in a calculation, statistically speaking, the better the fit.
Aggressive Number of Bar settings used include 60, 70 and 90. The
eSignal default set to 0 means all data is used for a Linear Regression
calculation.
While there are several ways to trade using Linear Regression Channels,
this strategy focuses on using the following settings: Source = Open,
Number of Bars = 0, Standard Deviation = 2.
The eSignal Linear Regression Channel Trading Strategy: The Setup
A simple trading strategy is to set the standard deviation to 2, look for a
stock trading in a trend and trade the extreme Linear Regression Channel
swings. To use this strategy, make the Linear Regression median line your
first target. In a best-case scenario, use the opposite linear regression
channel line as your second target. Use the outer channel lines and price
pivot as an initial stop loss, trail stops appropriate to the position and, as
price approaches targets, tighten your trailing stop.
NOTE: Use this setup for the Sell Strategy and the Buy Strategy described
subsequently.

1. Right click on an eSignal chart to activate the main menu and select
"Basic Studies" from the menu.

Study Properties / Explanation

14

80

%K

%K

%D

Upper band

Length

Smoothing

2. Select "Linear Regression".

3. Adjust the settings in the Linear Regression basic study window as

follows: Source = Open, Number of Bars = 0, Standard Deviation = 2.

ESIGNAL LINEAR REGRESSION CHANNEL TRADING STRATEGY: THE BUY

STRATEGY
1.

A. Find a trending market that has a major pullback in progress.

B. Buy the extreme price swing at the lower outer linear regression
channel.

C. Place an appropriate trailing stop below the lowest price bar spike
at the lower channel. (The reward potential for the risk taken should be
1.6 or greater.)

2.

A. Make the linear regression median line your first target.

B. Make the lower channel line your second target if the price trades
through the median line.

C. Maintain an appropriate trailing stop for your position.

D. Once your initial target is met, tighten your trailing stop.

E. If the price continues through the median line and approaches the
lower regression channel line, prepare to close the position out as it
exceeds initial expectations.

ESIGNAL LINEAR REGRESSION CHANNEL TRADING STRATEGY: THE SELL

STRATEGY
1.

A. Find a trending stock that has not exceeded the upper channel
until now.

B. Sell the extreme price swing at the upper outer linear regression
channel.

C. Place the appropriate trailing stop above the highest price bar
spike at the upper channel. (The reward potential for the risk taken should
be 1.6 or greater.)

2.

A. Make the linear regression median line your first target.

B. Make the lower channel line your second target if the price trades
through the median line.

C. Maintain an appropriate trailing stop for your position.

D. Once your initial target is met, tighten your trailing stop.

E. If the price continues through the median line and approaches the
lower regression channel line, prepare to close the position out as it
exceeds initial expectations.