Price Channels – How to Trade Trends
A fairly simple trading concept that I have come to utilize in my trading patterns includes the theory of price channels which zooms in on an equity’s current trend.
A price channel implies that a stock or market will move within a channel like formation and that the trend won’t change until a breakout has been confirmed. The breakout itself takes the stock out of this channel formation to either the upside (bullish) or downside (bearish). Depending the direction investors can make a decision to invest in or get out of this new trend altogether.
By following this theory investors can eliminate the need to call a bottom or top and take on unnecessary risk. Wait for the stock to build formation in the specified channel and then take action after a break out of the channel. The following are two examples that bring this concept together:
As you can see from the examples, price channels allow investors to avoid “fake” trends. What looked like a bottom can actually turn out to be further confirmation of reaching even lower levels. At the same time, a stock can move positive out of the sideways movement to give you lasting profits.
Price channels are a very simplified but effective trading method that can easily be built on. As you begin to learn more about technical analysis, you can eventually add on to your practice and soon create your own-patented trading methodology.
This was a guest post by Amey of The Wild Investor. Amey also runs Speak Stocks which teaches investors how to trade stocks.
