The Significance of Channeling in Options Trading
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Channeling is special because it gives hints to traders in different situations, for example, it does not matter if you have an impulsive move or corrective wave, there is always the channel that can lead you through your trades. Channels are very strong indicators of where to look for call and put options.
When traders are dealing with an impulsive move, the 2-4 trend line is appearing on the top of the first wave which gives you an indication where the fifth wave will end up once it appears on your chart.
Corrective waves are characterized by zigzags which can be double and even triple, and that is exactly where you should look for channels. Be aware of the fact that the zigzag pattern is the only corrective wave pattern that resembles an impulsive move. As a trader, your job is to look for call options in a rising channel before testing the lower trend line. The same goes for falling channels where you should place put options by the time the upper trend is tested.
Channeling is a great way to make educated guesses since it creates the ideal trading situation. When you have a channel, it means that a trend is already on its way before the channel forms which gives you the ideal conditions to ride a trend. When you ride a trend, you are simply buying the dips when the trend is bullish, and you sell spikes when you are riding a bearish trend. This situation indicates the perfect place for the striking price since the opposite channel side is going to support or resist a trend movement keeping it within the channel.
This simply means that if you have a rising level, the resistance is also rising, and vice versa, if you have a falling channel, the support is also moving down. This introduces you to the concept known as dynamic support/resistance. More about the dynamic support/resistance can be found in one of the sections of Binary Options Academy which is dedicated to this matter. Look it up to see how precisely you can optimize your trading with this feature.
Forming channels can be a challenging thing as well, and you need to know what to look for to find the perfect conditions to rely on channeling. The Elliot Waves Theory advocates that channeling is not supported with impulsive waves, so if you have a channeling move that looks like an impulsive move, it is probably just a zigzag pattern.
How to Tell Apart the Patterns?
To know exactly what pattern you are dealing with, you have to label or mark the waves. Before you label the first two waves, you have to draw a trend from the point where the impulsive wave starts to the point where the second wave ends which is projected on the chart’s right side. When you make (or draw) such a line, you copy it and paste it where the first wave ends in order to build a channel.
If the third wave seems to be reluctant and the price does not break the level on the opposite trend line, the chances are that you do not have an impulsive move at all. If this happens, you should know that such a wave is a corrective wave that is featured in its famous double zigzag pattern. Sometimes it can also be a triple zigzag, but that is not seen very often, especially when trading commodities like silver, gold, copper, oil. Triple zigzags are more common when trading currencies where trends can be very strong, so please make sure to remember this when you have zigzags on your chart.
How to Trade Options When Channeling?
A channeling market represents the perfect opportunity to ride a trend, which can be sometimes tricky, sometimes not. Channeling just needs a little experience since it is usually very easy to understand. Once you built a channel, you can divide into two parts. Of course, the perfect tool for this is Fibonacci’s retracement tool with which you can measure the channel’s amplitude on its right side and its beginning.
Afterward, you draw a trend line and link 50% of the channel and project it all together to the right side. What you will get is a double channel, i.e. one channel within another channel, whereby you can make the outer trend lines bigger to highlight the structure. Dividing it into parts gives you two channels or patterns.
This will help you dealing with different trends since some trends are stronger, others are weaker. Some strong trends might not be able to break through the 50% retracement, whereby other trends push the market higher or lower, which represents the ideal conditions for channeling.
In order to make your trades profitable, buying call options when the market is bullish before the price has retraced to 50% of the channel. As you divided the channel, also divide the intended amount for investment, and invest only half of the amount in this situation. On the other hand, when the 50% level breaks and the market are already touching the lower level of the channel, being aggressive will not hurt you since winning chances are almost guaranteed. Some suggest investing the double of the initially planned investment. Expiry date should be considered in proportion to the time frame where the channel is being built.
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