Channeling Stock - Trading Range
A
channeling stock is a stock in a trading range with prices bound by two parallel
trend lines. The parallel trend lines connect the highs and lows, which
form the area in which the stock is channeling. The upper trend line acts
as resistance, and the lower trend line acts as support. Channeling stocks
and trading ranges are the typical price action in stocks, as stocks tend to
trend less than half of the time. A stock which
breaks out of a channel or trading range is often affected by the duration of
the channel, the width of the channel, and the strength of the breakout.
Trading a channeling stock may mean buying support and selling resistance while
waiting for a breakout to occur and a larger move to trade.
Context: Complete lack of trend during the channel or trading range, but often preceded
by a trend.
Appearance: A channeling stock has limited movement and is bound by
well-defined trading range. There is resistance above the stock and support below. Sellers lurk at
resistance, preventing the stock from making new relative highs by selling at
higher prices. Buyers lurk at support,
preventing the stock from trending lower or making new relative lows by buying
at lower prices. This leaves the stock with horizontal price action rather
than an
uptrend or
downtrend. The trading range may be wide or narrow, and
is typically only resolved with a high-volume thrust to new relative highs or
lows.
Trading Channels: Channeling stocks offer a variety of trading
possibilities. Some traders will buy the stock at
support with a stop-loss
placed below support, anticipating a move back up to the top of the channel.
Other traders will short sell the stock as it reaches the high end of the
channel in anticipation of a move back down toward support, where they expect to
cover the short for a profit. Finally, breakout traders will wait
patiently for the stock to break out of the channel entirely before initiating a
trade, expecting the stock to resume its prior trend. The price projection
for a stock breaking out of a channel is dependent upon the characteristics of
the channel as well as the intensity of the breakout.
There
are three types of channeling stocks:
Descending Channel
Ascending Channel - Rising Channel
Rectangle Pattern
Click descending channel, rising
channel, or rectangle pattern to learn more about each channel pattern.
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