3 Reasons to Buy “Channeling” Stocks
One simple pattern can help you easily book winning trades in a trending market.
You don’t have to be a professional trader to take advantage of this set-up. You can even use the pattern I’m about to show you even if you know next to nothing about technical analysis. All you have to do is recognize the key features and respond to the pattern’s clear buy and sell signals.
The pattern I’m talking about is called a trend channel. A channel is easy to spot. It consists of a trending stock flanked on either side with a high and low range. In our example, the high range (resistance) is marked by a red line. The low range (support) is marked by the blue line:
Buying channeling stocks makes perfect sense right now. All of the important ingredients are in place to execute a successful channel trade.
First, the market is trending higher. It’s always in your best interest to take the path of least resistance when trading. So if you’re planning to go long, you want the overall trend moving in your favor. Since stocks are generally moving higher this year, trading a rising channel will sync your buying with the broad market.
Next, the recent pullback has expanded your trading options. The best time to buy a channeling stock is when it bounces off the lower end of its trading range (the blue line in our example). As the market retreats from overbought levels, many of these channeling stocks have followed suit. With more prices testing channel support, you have a variety of channeling names that are flashing buy signals right now. Buying a stock as it perks off support is an ideal low-risk trade. If support fails to hold, you can exit the trade with minimal damage to your account.
Finally, a stock trending higher in a channel could be setting up for an even bigger move. A stock that is exhibiting a channel pattern is already trending higher. But if the stock breaks above resistance (the red line in our example) the uptrend could accelerate. Old resistance becomes new support, and the stock moves even higher. Using the channel, you would have been able to time your buy perfectly to maximize your gains.
As you can see, one of the main benefits of channeling stocks is that they give you clear-cut buy and sell signals.
Channels are also useful for traders with different goals…
Take a look at the buy and sell points noted with the arrows on our next chart. If you’re a trader who is comfortable using shorter timeframes, you can use the channel to make multiple trades. You can buy at support (blue arrows) and sell at resistance (red arrows), taking profits along the way. Or, if you prefer to hold positions for a longer timeframe, you can act on the initial buy signal, and hold the stock for the duration of the trend.
You don’t need any fancy pattern recognition software to find the perfect channel trade. You can go to virtually any free online stock screener tool to search for your trade candidates. It can be as simple as searching for stocks within 5% of their 50-day or 52-week high. Or, you could search for stocks that are trading above their short, medium, and long-term moving averages.
The key is finding stocks that are trending higher. Then, it’s just a matter of scanning the charts and finding the best looking channel setups. No matter how you search, you should have no problems finding low-risk, high reward channel trades.
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