Using the Past to Predict the Future: The Channel

The second basic element for a chartist or technical trader is the channel as shown in the image below:

Again, as a chartist, you do not care why this investment opportunity is behaving this way, you just want to take advantage of it. If the above opportunity was a commodity I would enter the market with a short position at the top of the channel and a long position when it is at the bottom. In stocks I only do long positions. If you recall a long position is a “buy” to enter the market and a “sell” to exit the position. In a short position you “sell” to enter the market and then “buy” to exit the position. If the market goes against my position either above or below the red line, my stop-loss orders would activate and I would be out of the market. Calculate those possible losses to make sure they won’t bring on a margin call. A margin call is when your losses exceed the amount of money in your trading account. This is why paper trading is vital to your success. Even when you are in the market and trading with real money, paper trading other opportunities is very important.

The chart above shows a channel that has went on for 6 months and is continuing when I printed out the chart. However, we are seeing the whole thing. Use your hand to hide anything after mid-December. This is when I would have entered this stock in a long position anticipating that the price will rise based on its past behavior. My stop-loss would be set just below the red line. When the price got close to the upper red line, probably at about $15.70 I would set my limit-sell order at $15.69. Remember why I set all my orders on odd numbers? Right, because there will be a flood of orders at $15.70 and when I want out, I want out! You might say that why exit at $15.69 it will probably go higher and in fact the chart says it did. Remember that you are looking at and using the past to predict the future. Be a smart trader. Don’t get greedy. Billions are lost every day in the markets by greedy people wanting just one more dollar of profit. Remember this: You can’t make a mistake if you exit a market, any market, with a profit! Yes, you might make more, but that is the attitude that guarantees failure. The chartist is a smart trader. Emotional attachment to a market, a company, or to money weakens your ability to think clearly and act decisively. Besides if I had traded this opportunity I would have entered a long position at about $13.70 a share and exited at about $15.70 for a gain of $2 a share. No big deal? That amounts to a 13% gain in only a month and a half or an annualized 104% gain. Not all trades will be successful, but the ones that are you’ll talk about for the rest of your life!

The chart above represents May 2018 Corn Futures. Unlike stocks, commodities have contracts that have a start date and expiration date. Commodities are heavily leveraged meaning that although it takes a small amount of money to control most futures contracts you make or lose money based on the actual value of the whole contract. It’s like you put money down money on a car, say a $100 down on a $10,000 car. You control the car, but if the value of the car goes up $1,000 you make $1,000. If the car’s value goes down $1,000 you lose $1,000 even though you don’t yet own it. So if you exit a long commodity position with only a $100 down payment, but the commodity contract value goes down $1,000 you own the market $900. Commodity trading is not for people with bad health. A good day can make you rich, but a bad day could kill you.

Commodities are much different than stocks and require a great deal of education to trade. Education that is far beyond what I provide for you here, but if you want to run with the really big dogs, like banks and large financial institutions, commodities are where you want to go. Commodity charts have the same formations as stock charts.

Go to bigcharts.com or futures trading charts and just randomly select some companies or commodities and look at their charts. Can you find the 123 or channel formations? Remember that hindsight is 20/20 vision. We are interested in recognizing opportunities based on the recent past and taking advantage of them BEFORE they become history.

In my next post I will share the “Break Point” strategy which provides a short term gain opportunity. If you are following my posts on chartism, don’t be impatient with future posts. I’m getting them done as fast as I can. Understand that this is a trading strategy for the rest of your life and if you just can’t wait for additional information you might already be falling into a greed based mindset. Remember what I said above about greed and the impatience it can create. Thanks for following along!

Previous and Upcoming releases:
Financial Charts: Using the Past to Predict the Future
https://steemit.com/newbieresteemday/@chuck2u32/financial-charts-using-the-past-to-predict-the-future
Using the Past to Predict the Future: Chartism History and Uses
https://steemit.com/newbieresteemday/@chuck2u32/using-the-past-to-predict-the-future-chartism-history-and-uses
Using the Past to Predict the Future: The 123 Formation
https://steemit.com/newbieresteemday/@chuck2u32/using-the-past-to-predict-the-future-the-123-formation
Using the Past to Predict the Future: The Channel (This Post)
Using the Past to Predict the Future: The Break Point
Using the Past to Predict the Future: Long Term Strategies of Old Money
Using the Past to Predict the Future: Finer Points of Chartism
Using the Past to Predict the Future: Order Placement Strategies

Resources:
https://www.thechartist.com/
http://bigcharts.marketwatch.com/default.asp
http://futures.tradingcharts.com/menu.html
https://www.barchart.com/futures
https://en.wikipedia.org/wiki/Chartist_(occupation)