What is a channel?

What is a channel?

  • A channel is formed when the price of an equity fluctuates between two parallel lines over a period of time.
  • The more times the price of an equity hits the top or bottom of the channel, the more reliable that channel will be.
  • A channel marks a period of time in which investors think and act alike.
  • Channels reflect “market sentiment” and collective action based on insider information (if any exists).

Characteristics of channel trading

A suitable channel to apply in trading should have the following characteristics:

At least two peaks and two dips, more is better.
Support lines and resistance lines should be as close to parallel as possible.
The length of the channel should be at least 20 days/weeks/months, the longer the better.
The width of the channel should not be too narrow. If a stock’s price goes straight up or straight down, it is too volatile, and is best avoided.

Basic Channel Shapes and Investment Categories

Ascending channel: To aggregate wealth locate companies with steady growth.

l   Short term trading based on daily channels:

1.           Build up a position and let it ride till it breaks. Hopefully it will grow to become a weekly ascending channel.

2.           Buy ETFs that do shorting.

3.           Avoid skyrocketing stocks that do not form channels.

l   Long term trading based on weekly or monthly channels:

Hold or invest in stocks with confirmed positive trends. You still need to watch out for the channel breaking.

Descending channel: Protect yourself from bad investments and take profit from bad stocks when obvious.

l  Short-term daily channel trading:

1.           There are always companies performing badly.

2.           There are many good targets to short when the macro economy or S&P 500 goes south.

l  Mid-term weekly channel trading:

When an industry is trending downwards, consider shorting companies in that industry.

Wide flat channel: Guides you to take profit from dividend stocks or cyclical stocks

l   Mid and long-term investment based on weekly or monthly channels:

n   Buy those with good dividend returns and return on investment.

n   Buy and sell according to weekly or monthly channels.

n   Do not buy at high prices, or at the upper bounds of the channel.

Narrow flat channel: Track the companies that you think have the potential to change

l  Patience will be your reward, no need to outsmart the market.

l  Wait for channel breakout, either upwards or downwards.

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.