http://www.thegreedytrader.com/RisingChannelSupport.aspx

http://www.thegreedytrader.com/FallingChannelResistance.aspx

In addition to the basic trading rules a channeling technique provides risk management in form of stop-loss rules:

1. If you enter a long position at a channel support level, set a moving stop-loss slightly below the support.

2. If you open a short position at a channel resistance level, set a moving stop-loss slightly above the resistance.

There are additional trading rules and techniques that can help to improve performance and reduce the risk in case of the channel breakout, false breakout and channel narrowing.

Breakout appears when price breaks through the support or resistance line. You can tight protected stop-loss order to limit your risk. Some traders use channel breakout as a trend reversal confirmation to open a new position in the direction of the new trend. To estimate the minimum breakout target some chartists suggest measuring the vertical distance from the trendline to the latest high/low and projecting it from the breakpoint into the direction of the breakout.

In example with QQQQ above, if a trader opens a long position at channel support 38.65 on May 23, 2006 he immediately places a moving stop-loss order slightly below the support. When a price breaks the support line and a stop order is executed, a trader can also enter a short position to profit from the channel breakdown.

While a channel breakout terminates the current channel, the false breakout appears when a price just pierces the channel trendline and then moves back into the channel area. Usually a false breakout scares traders out of the stock and makes breakout traders enter the wrong position.

In opposite to the false breakout – the channel narrowing appears when price drifts inside the channel area without touching the support or resistance trendlines. In this case the narrower channel could be considered or other techniques can be used to enhance the accuracy.

There are several techniques you can use in conjunction with channeling to help verifying the channel strength, recognizing the price reversal and predicting breakouts.

1. Overbought/oversold momentum oscillators and bullish/bearish divergence are useful for providing early warning signals of trend reversal.

2. Candlestick patterns can be useful to confirm the price reversal or a channel breakout.

3. Fibonacci technique is helpful in finding hidden channel cyclicity to spot an intermediate support/resistance within the channel area as well as for estimating the breakout target.

4. Analyzing chart trends in several different time frames can also help you accurately determine the price reversal and a channel breakout.

5. Channeling trend often presents an Elliot waves structure. The sub waves in the direction of a major trend have a five-waves impulse structure while sub waves in the opposite direction have corrective three-wave zigzag structure. Using Elliot Wave analysis with channeling stocks can provide a valuable trading strategy for an experienced trader.

Channeling works the best for short and medium-term trading with ETFs and medium volatility stocks. Channeling provides one of the most accurate and reliable market timing techniques especially when it is used in conjunction with other technical indicators.

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