Understanding Trading Channels on a Stock Chart
When looking at charts, patterns are in the eye of the beholder. While a group of analysts will look at the same picture and derive different opinions, there are general rules we can apply. The most important is that any trend line must have three points on contact with the data series.
The below chart of MasterCard (MA) is one I have featured in my newsletter EPIC Insights this week. It shows a traditional trend with points of contact established at the three arrows.
Click to ViewWith an established downtrend, we can safely short the stock when it price hits the downtrend and then fails. However, the question then becomes at what level should we profitably close the trade? Using the same principles as before, we can draw a lower limit of the points where the stock should rally and a trader can either cover the short or go long.
Click to ViewWhile each chart is useful on its own, together they provide a clear trading strategy. By combining a lower trend line with a higher trend line we develop a trading channel that offers effective trading opportunities. When you hit the lower band buy and the upper band sell.
With MA, a trader who shorted 100 shares at the top of the market has returned 53% on this trade. However, a swing trader who would short at the top of the channel, cover and then go long at the bottom of the channel during the entire selloff has returned 154%.
Click to ViewBy staying disciplined and trading to a set strategy, great gains will come your way.
Blain here. Read Sean’s latest issue of EPIC Insights exclusively here on stocktradingtogo.com and email us to get on the free weekly mailing list.
