Training Education: Parallel Channel Identification
In this article I want to provide help so traders can identify channels and annotate them on charts to help make trading easier which in turn makes you more money. I was recently asked on StockTwits, after posting a chart of a cryptocurrency I was trading ($NANO), how I determined channels. So I decided to add this article to help traders.
The example here is of a cryptocurrency but the same pattern can be found with all assets that are traded. The first thing to note is that an uptrend parallel channel is a bullish pattern in which traders should be in a Long position. A downtrend parallel channel can also be traded in the same way but by going Short.
A parallel channel pattern will typically have price peaks, sell off at the top of the channel (Resistance) and get bought again at the bottom of the channel (Support). Below I will show a step by step guide how to identify and setup on your chart using tradingview.com.
Identify An Uptrend Parallel Channel
The first thing that you must do is find a stock or cryptocurrency in a clear uptrend. I start off with a higher candle setting 1 day for stocks and 12 hour – 1 day for cryptos. For cryptocurrencies you may be limited at times due to the amount of trading history. If the crypto has only been trading for several days then you will need to use a much lower candle setting.
Depending on the asset and what type of trading I am doing will determine my final candle setting. If I am making quick trades (Over a couple hours or less.) then I will use 30 minute candles, 1 hour candles, etc. If I am trading a stock or crypto over the long-term (Over a couple days or weeks.) then I would use 6 or a 12 hour candle chart for cryptos and a 1 day chart for stocks. In the example below we will take a look at $NANO.X.
The first chart setting we will look at is the 1 day chart (Each candle = 1 day) and you will notice a reversal into an uptrend. (**Click Each Chart To Expand**)
Unless we are willing to just blindly buy and hold we can’t find a tradable channel and will need to “zoom” in.
So as you can see as we look deeper into time we get more and more definition. For this example we will use a 1 hour chart. From here I will zoom into the 1 hour chart so we can start to see the actual trading pattern. Here is what the above 1 hour chart zoomed in (Roll mouse scroll button once you have clicked on the chart.)
With the 1 hour chart zoomed in we are able to see a pattern developing within the chart. Now lets build our channel.
Step 1 – Visually Establish the Peak & Low of the Trendline
The first step is to determine the top and bottom of the channel. This is done by picking two candles that touch the top of the trend and two candles that touch the bottom. A trend line is nothing more than a diagonal line in which the trend will lay.
Now that we have visually determined two candles that look to establish a overlaying trend line we will start to draw our channel.
Step 2 – Choose the Parallel Channel Tool
This example will be performed with TradingView.com but I have used the same tool in other trading platforms like TDAmeritrade, ThinkorSwim, etc. All trading major trading platforms should have this tool.
Step 3 – Begin Drawing the Parallel Channel
Now that you have selected the tool we will begin drawing the channel. Click on the high of the first candle we established in step 1. Once you have clicked on this candle you will then overlay the top of the parallel channel over the high of candle two and extend it beyond the candle.
Step 4 – Complete the Parallel Channel
Now that we have overlayed our top two candles we will need to click our mouse (Continue to keep your finger on the left click button.) to lock the top of the channel. From here the tool will allow us to pull down and overlay the bottom of the channel to the low of the two lower candles we established in step 1.
From here we have our channel drawn. In the image above I displayed the channel with existing price with time so we can compare what happens when we extend the channel. Let’s us take a look at how well this channel worked in helping us determine tradable resistance and support levels.
Each of these arrows indicate tradable events. Because of the nature of this particular asset (Cryptocurrency) I sold everytime $NANO.X hit the top of the channel and bought again at the bottom of the channel. Not every asset needs to be traded this way. Stocks can easily be bought when in a clear uptrend with a stop set below the bottom of the channel.
Here is the same asset and notice that it broke out of the channel. Breaking out above the upper channel (Resistance) is a buy signal but with a cryptocurrency but you need to play very carefully and sell partial shares into the run. Keep some lotto shares (25% or less of your original shares) is a good idea once you have sold your partial shares into the breakout. You should either use a trailing stop or manually adjust your stop to just below the bottom of the upper channel. Notice once it broke the top of the channel it then found support at the bottom of the channel. Once it broke below the bottom of the channel all bets are off and the asset shouldn’t be traded again until it establishes a new pattern.
I hope traders find this helpful and please share this page with others. Stay tuned as I add more Trading Education pages.
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Mark aka TheBossTrader