Always Trade A Proven Strategy
As I’ve recently been promoted to the position of Jr Moderator into the Warrior Trading chat-room my popularity has obviously risen and I feel an increased responsibility about the information that I share with the community. In fact, I’m getting very interesting questions from other traders about technical aspects of my trading.
One of the most recurrent request that I get, of course, is about possible entry/exit points for a trade. This is the most critical side into trading, differentiating a successful trader from a failed one in the long run. How to get this job done? Easy, you need to always trade a proven and successful strategy. This is why I decided to write this article about a technique that I use often for my trading.
The name of this strategy is “breaking channel” and I’ll get into the details into a new article in the near future. Indeed, in order to talk about how to trade breaking channels, I need to introduce an important concept first which is an unavoidable pre-requisite for applying the strategy just mentioned above.
How To Draw A Channel Live
First thing we need to know is what a channel is in trading. According to Investopedia: in the context of technical analysis, a channel is defined as the area between two parallel trend lines and is often taken as a measure of a trading range. The upper trend line connects price peaks (highs) or closes, and the lower trend line connects lows or closes. Breakout points in channels indicate bullish (on upward trends) or bearish (on downward trends) signals.
Once you have this concept clear, here is what to do in order to be able to find channels:
- Use a timeframe you’re able to handle (I use the 5mins and daily charts);
- Get used to draw into the charts (through the adoption of a professional tool such as eSignal);
- Watch closely the trend of a stock symbol you already have in your watch-list (high-relative volume with news are most welcome);
- Once you observe a trend that lasts for at least 10 candles, look for drawing two parallel segments that represent the borders of the channel.
So, a channel is stronger the more taps it gets to its borders. Moreover, the stronger it gets, the more reliable its signal is for a possible trade. Now that we know what to look for, the challenge is about how to find channels in real-time. As day traders, finding those before a breakout/breakdown is primary for capitalizing these trading opportunities.
It took a little time for me to be able to identify channels live. So, first of all, it takes a little practice and experience on watching charts as they go. Then, it’s very important to look at those charts critically for what is really happening instead of what we think it is going to happen. One of the best qualities of a successful trader is the ability to cut out any sort of preconception and wait for the best setup to form in order to act at the most promising moment.
On average, I’m able to recognize a strong breaking channel setup around 2-3 times per-week, making those great opportunities for very high profit/loss ratio trades. If you aren’t very familiar about how to find channels in real-time, this can be a good time to start hunting for those. A great exercise can be to look for channels for an entire week and collect data about how many of those you’re able to find out.
Once you’ve done that, it will be just a natural consequence to figure out how you can trade those. If not, you don’t have to worry, a new article specifically addressing this breaking channel strategy will soon be available.
See you in chat-room.
Trade safe,
Roberto Barbaro