Part 2: When to buy and when to sell?

The Action Plan feature is designed to help you leverage the merits of channel trading more closely. This means you can build positions in a safer manner and hold those positions until the channel breaks. Using this mechanism you can cut your losses and allow your profits to run.

In addition, after practicing the Action Plan functions, it will become second nature for you to follow the trading wisdom of successful investment gurus. Among these wisdoms:

  • Don’t build up positions in the wrong direction
  • Don’t buy too late or when the price is already too high
  • Don’t sell or short too early
  • Don’t bottom fish
  • Don’t do flattening

Before looking into the Action Plan functions, let’s see what to expect in using them.

Basics of Channel Trading

Watch and Trade: A safer way to build up position in a stock

Let’s say you spot a channel, whether newly formed or one that has been formed for a period of time, and you have done your homework and decide to establish a position in the stock. There is however no guarantee that the channel movement will continue. So, you still need to build up your position with care. To do so, you need to follow a channel trading mechanism.

You buy at the channel-buy-line and adjust some of the position at the channel-sell-line (since you don’t know if the price will move back up to the channel), and then buy more when the price comes back to the channel-buy-line. You continue this process until you build up an appropriate position. An appropriate position for an ordinary stock investor is suggested to be 10%~20% of the total assets you allocate for stock investment. This is equivalent to holding 5~10 different stocks in your portfolio.

The channel buy line is near the channel supporting line at the bottom. The buying point is triggered when the price movement bounces off the supporting line and returns to the channel buy line. You buy some stock whenever the price touches a channel buy point until you build up a proper position. You sell some stock at the channel sell line to protect yourself, as you do not know if the price will come back to the channel.

After this you build up the position you hold until the channel is broken, then close out the position. The system will issue clear and immediate alerts at optimal buy and sell points.

For short positions, you do the same thing: establish a (short-sell) position and hold, until the channel breaks. You have more position (short some stock) at the channel short line, adjust position (cover some stock) at the channel cover line, until you reach your preferred short position, and hold the position until the channel breaks.

When does a channel break?

The system offers channel breakup and breakdown lines. Users can adjust the lines with finger swipes. It is worth noting that channel breakup or breakdown has nothing to do with the cost of your investment (the price you bought the stock at). It has to do with the channel shape and movement itself. Default setting for breakup and breakdown lines are two-thirds of the channel width. The user can adjust the range to within 1/2~3/2 of the channel width.

buy or hold the stock. However, if the stock is overvalued, this breakup may be a warning sign that will trigger a sell off by institutional investors. If you do not already have an established position, and there is no fundamental breakup, it is better to leave the stock alone.

When the price falls below the channel breakdown line, it is generally a good idea to clear out the position. If and when the price rebounds, it is better to wait until it forms a channel in line with the previous channel.

In the previous example, say the stock breaks up and then comes back down, this signifies its time to take profit and sell off some stock. If after breakup, it forms a newer and steeper channel, hold until it breaks. In this example, if in the future the stock falls below the breakdown line, it means its time to clear out the position, or at least substantially reduce your holding.

In the system we use breakup and breakdown, as opposed to breakout or breakthrough, for a clear correlation with the channel, either ascending or descending. When the price goes above the channel it is in breakup, and when the price goes below, it is in breakdown.

Now let’s look at how channel trading can help us develop sound trading discipline.

The Earning Channel software, as well as the articles, tutorials and suggestions in the website and social media, are provided as tools and references to help users develop their own market analyses and make their own investment decisions. Users are ultimately responsible for the way in which they use this information to invest in the stock market. Nothing associated with the Earning Channel or the information presented in articles and tutorials should be interpreted as direct advice on buying or selling of securities.