Channel Surfing.pdf

CHANNEL SURFING

Riding the Waves of Channels to Profitable Trading

Written by Michael J. Parsons

CHANNEL SURFING

In my work of researching and writing about advanced methods of trading, I was asked

for a simple method for entries and exits. Because of that request, I wrote a basic outline

for a method that I originally called Channeling . Since writing about Channeling , I have

received a few requests to expand on this subject because many who have tried this

method have found it to be a very solid and practical way to trade the market.

In one request, I was asked where one could go for more information on this subject.

Much to the dismay of this person I had to admit that aside from what I had already

written and some basic techniques mentioned by a few others, there were very few good

sources that I could refer this trader to.

This brought home to me the fact of how much this method has been overlooked, even

though it is obvious that there are many in this business that use it in one form or another.

My own knowledge of this method was originally derived with some basic writings of

other writers and expanded on through trial and error, and of course, experience. Today,

my own use far exceeds the basics that I have seen written on the subject.

So, while Channeling is not the focus of my work when it comes to trading research

(because I consider it basic), I know the value of using it and thought it would definitely

be beneficial to expand a little further on this technique.

Additionally, instead of referring to this method as Channeling , I now believe it is better

described as Channel Surfing .

In many ways it’s like a surfboard riding a wave. Once the wave slips away from the

surfboard, its time to find a new wave to ride. Channel lines are your surfboard and price

your wave. As long as your surfboard rides the price wave then just hold on for the ride.

Channel Surfing is simply using Channels to set parameters for the price movement. For

those of us that are mathematically impaired, this is very graphical way to determine

what floor traders do every day, the markets expected range. The value of this is that you

have a gauge where the market is expected to go and if it exceeds that, than you are

alerted to a change of a markets condition.

Here is how it works. Whatever way the market is moving and based on the highs or

lows, you draw a trend line along the price bars. On the other side of the price movement,

you draw a similar trend line and thereby, create a Channel . In effect you have put a

fence on the price movement and have a visual range parameter. Each tick that follows

should be within that Channel . Whenever the price bars exceed that Channel in either

direction, then it is time to take action.

Notice in Figures 1 and 2 how a Channel is drawn and how there is an inner and outer

Channel that reverses roles depending on whether you are in a bull or bear market (going

up or going down)

FIGURE 1

FIGURE 2

So now that we have a basic idea as to how a Channel is drawn, how do we use it?

The Channel is our guide for making our trading decisions. As long as the market price

bars remain within the Channel , then our trading decisions remain in force. But as soon

as the market price bars extend outside the Channel , then it is time for a new trading

decision.

For example, lets say that you were in this market and the market slows and extends

outside the upper resistance line in a bear (down) trend. My plan here would be to get out

as soon as it does this because this normally signals that the market has gone into a

sideways pattern or reversed.

Take a look at Figure 3 . In this chart, I have entered a trade by shorting (selling) a

contract at the point it breaks a support line. As it drops, I draw Channel lines. Notice

how the market has extended outside of the inner Channel . If you were still in a trade at

this time, you would then exit.

FIGURE 3

But what if it extends pass the other Channel line instead? When it does this, in a large

percentage of the time it ends up becoming what is called a spike and the market reverses

direction. Therefore, I would still exit a trade. Notice Figure 4 and what happens.

FIGURE 4

By doing it this way we are able to lock in a higher amount of profit from our trade.

If you are able to watch a market during actual trading times and come across this

situation, when it exceeds this line you can follow it up until it finally reverses or at the

close of the day and lock even more profit.

Personally, I will look for a move that is at least 50% of the total range above the upper

Channel . But even if you just set a stop above the line and below the lines each day, when

it hits the stop it will lock in your profit without putting you at undue risk. Just make sure

your broker understands that if one stop is hit that it cancels the other stop, otherwise you

will end up entering the market when you do not want to.

Of course, it is true that when the market exceeds your outer Channel line that it is

accelerating and from the perspective of most traders, this seems great. So why would

you want to exit at this point? Won't you miss a lot of profit?

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