Traders handle channels differently. Some traders bet on long shots, they tend to buy upside breakouts and sell short down-side breakouts. When they see a breakout from a channel, they hope that a major new trend is about to begin and make them rich quick.
In the other hand, some traders trade against deviations and for a return to normalcy. It is normal for prices to remain within channels. Most breakouts are exhaustion moves that are quickly aborted.
Therefore, they like to trade against them. They sell short as soon as an upside breakout stalls and buy when a downside breakout stops reaching new lows.
There is nothing wrong trading breakouts, since it can produce spectacular gains for traders when a major new blows out of a channel. However, most breakouts are false and are followed by reversals.
The following are some recommended rules for trading with channels:
1. In cases of using a moving average channel, when channel’s slope is relatively flat, it is almost always good to buy near the bottom of its trading channel and good sell near the top.
2. In trending market while a channel rises sharply, an upside breakout of the upper channel line shows very strong bullish momentum. This indicates that you will probably have one more chance to sell in the area of the highs that are being made. When the market returns to the upper channel line, it is time to sell your long position.
3. The above rule can also be applied in reverse during sharp downtrends. A breakout below the lower channel boundary indicates that a pullback to the moving average is likely to occur, offering another opportunity to sell short. When the market returns to the bottom of channel, it is time to cover shorts.
The better trading signals are given by a combination of channels and technical indicators. Most well-known signal from indicators is when they diverge from prices.
Let’s continue with some recommended rules for combination of channels and indicators:
4. A sell signal is given strongly when prices reach the upper channel line while an indicator, such as RSI, traces a lower top and creates a bearish divergence.
5. A buy signal is given strongly when prices reach the lower channel line while an indicator traces a higher bottom and creates a bullish divergence.
6. Go long below the moving average when the channel is rising, and take profits at the upper channel line. Go short when the channel is falling, and take profits at the lower channel line.
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