Projecting a Channel

channel-education

Channeling vs. Binary Options

Channeling

Channeling is a technical stock trading term that comes from market analysts that use charts to follow the trends of the markets they are interested in. This type of trending is popular because the channels are recognizable and based on logic.

There are areas of support and areas of resistance in the charts. Areas of support mean the price is typically cheap. It is the point where the price hovers on its way down. The buyers outnumber the sellers. Areas of resistance mean the price is typically high. It is the point where the price hovers on its way up. At this point, the sellers outnumber the buyers. The best strategy, then, is to buy into support (price is low) and sell into resistance (price is high). The channel lies between the area of support and the area of resistance. The price will stay in this range until a breakout occurs. A breakout is when the price breaks above the level of resistance or below the level of support. These are areas where trades take place and it can be quite volatile.

Binary Options

Trading Binary Options is a little more sensitive because you are trying to predict what the market will do. You are wagering on the answer to a yes or no question: will the price go up or down in a certain time period. The timing and price cycle is extremely important. If you are not following the trends it is just a shot in the dark as to which way the market is going to move. With Binaries you can trade both sides of the asset as well.

Channeling trends can be laid over top of the Binary Options trends and can be very helpful in determining the up or down trends and when to buy into support (call options) and sell into resistance (put options). By charting the two together you will get a double zigzag pattern which will detail the trends of highs and lows over a period of time.

How Channeling Works

Channeling starts with a chart – a series of highs and lows. The trader is looking for a trend such as a series of low highs that break to previous lows. This could be the start of a trend. The trader then draws a line from the first high to the next lower high and projects it all the way through to the right-hand side of the trend chart. This, then, is the trend line.

To build a Channel, the trend line is pasted over the lowest level that hit after the first original high. The Channel build is starting. You now have a higher trend line and a lower trend line. By analyzing the trend lines you can see that you should buy call options at the lower end and put options at the higher end. The lower side of the channel is considered to be bullish and the upper side of the channel is bearish.

Elliott Waves & Channels

In Elliott Waves there are both impulse and corrective waves. There are always 5 impulse waves followed by three corrective waves. Each set of waves also has a subset inside each wave that follows the 5-3 pattern. The impulse waves move in the direction of the trend (bullish or bearish) and the corrective waves move against the trend.

Corrective waves are where you can form a channel. You will find the double and triple zigzag waves an optimum point for channeling. A zigzag follows a 5-3-5 pattern, meaning the A wave will be comprised of 5 sub-waves, the B wave will be made up of 3 sub-waves and the sequence will be finished by wave C with 5 sub-waves; the sequence together forms a zigzag pattern. The introduction of an X wave is what determines a double or triple zigzag. The 5-3-5 pattern continues but happens in a double where the X wave happens followed by another 5-3-5 pattern.

By theory, the channel must end at the upper or lower side of the channel (depending if adjustments are bearish or bullish). However, it is not mandatory where the market will move. It can move above or below the channel, but it must end at the area of resistance or support based on what the opposite side of the channel is doing. This again ends up with buying into support (call options) or selling into resistance (put options). This movement above or below the extremes of the channel is considered a breakout – the place where trading begins.

Pitchfork Tool

Strong trends can usually predict a channel. A Pitchfork tool can be used to find a channel. A pitchfork tool takes the shape of a pitchfork in that it has three “tines”. The three tines connect three points: the low, the higher and a higher low OR a high, a low and a lower high, depending on a bull or bear market. If you draw a line following the points of your pitchfork tool you will have a median line and two parallel lines, one on either side of the median. The three lines together make two channels. The midline is where the price should be attracted. The other two lines predict the support and resistance movements.

Conclusion

Using channels formed from Elliot Waves is a great way to determine when to trade or use binary options. The more you study these trends and use the tools, the more knowledgeable you will become and will be able to recognize these points and trends much easier.

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