A stock that moves in a repeatable pattern between two price points over a short period of time is called a Channeling stock. These two price points become the support and resistance levels for this stock. The objective is to trade bullish as the stock rises off of the support and trade bearish as the stock falls from resistance.
Rules:
- Using a charting software or brokerage platform, create a solid equity watchlist and start looking for channeling stocks. You need two tests of the support line and one test of resistance in order to establish the beginning of a channeling stock.
- Look for stocks in the $15-25 range for equities. You can look for higher priced stocks if you are using options..
- Be sure the channel hits support and resistance at least twice a month
- Draw horizontal trend lines on your charts to help identify the channels.
- The Average Daily Volume should be a minimum of 300,000 shares traded per day.
- Stochastics (a Technical Indicator that works well with channels) should be moving up above 20% for bullish or down below 80% for bearish.
- As the stock bounces off the support line, buy the stock. Immediately set your Stop Loss just below the support. Set your Profit Target at the price point just before the stock reaches the resistance line.
- If you are comfortable with options, you can trade options instead of stocks in the same manner.
Stocks move in three ways; up, down and sideways. A channeling stock is normally in the sideways direction. Channels usually move from support to resistance and back to support three to five times before breaking the pattern. Some, of course, can run longer than that, just be cautious after five channel rotations.
Channels can run in an uptrend or downtrend as well. Learning how to draw your support and resistance lines is very important.
The Channeling stock strategy is one of the steadfast strategies and is frequently overlooked because of it’s simplicity. Channeling frequently occurs at market tops and market bottoms and should not be disregarded.
Learning the intricacies of the channeling stock strategy is perfect for starters and for anyone who like consistency. Take advantage of TradingU at wealthbuildershq.com to learn as much as you like with Channeling stocks.