How to Find Channeling Stocks

Channeling patterns move between support and resistance.

One of the most reliable chart patterns to trade are price channeling patterns. Unfortunately, beginning traders often don't know how to find channeling stocks or understand what makes up a solid channeling pattern for trading. However, if you understand a few simple rules, you will be able to find many opportunities for trading with this price pattern.

Things You'll Need

• Computer
• Stock charts
• Pen and paper

Instructions

Identifying Channeling Stocks

1. 

   Set up your work station.

   Go to a computer and log on to a free charting service like FreeStockCharts.com. Input all the stock symbols for the S&P 100--the top 100 publicly traded companies in the U.S.--in the left-hand column. This column is where all the symbols will be displayed so that when you scroll through them, they will pull up the price action for that particular stock.

2. 

   Make a list of candidates for channeling stocks.

   Identify stocks that are moving in waves, up and down, and between two parallel price points. There are three types to look for: ascending moves, descending moves and horizontal moves. Write down those stocks for further study.

3. 

   Draw a support line through two price lows.

   Click on the "Draw" button in the tools section of FreeStockCharts.com and draw a support line, connecting a series of lows on the price action with at least two price points. No other price action must trade through this support line when connecting the two lower price points.

4. 

   Create a parallel line for resistance to form a price channel.

   Click the support line for a list of options and select the "Create A Parallel Line" option. That will create a parallel line in the same trajectory as the support line. This is the resistance line. Place this opposite the support line, over the price action while connecting two upper price points but without any of the remaining price action trading through it.

5. List any stocks that fit within these support and resistance lines. These are the channeling stocks in the S&P 100.

Tips & Warnings

• The more times you can connect a support or resistance line through many price points, the stronger the channel will be for trading. Just be sure that the other price action doesn't violate the line while drawing the lines and you will have identified a good channel pattern.

• Trading price channels is a solid method for trading, but be sure to set your stop-loss just below or above the support/resistance line depending on what direction you are trading. If the channel fails, then the stop-loss order will protect you from a big loss by liquidating your position.

References

• Stock-Article.com: "Trading Channeling Stocks"
• Investopedia.com: "Channel"
• StockTradingToGo.com: "Ascending Channels on Stock Charts"

Resources

• FreeStockCharts.com