I love a good reliable trade setup…
A setup that has proven itself time and time again so we know when we enter it that the odds are in our favor it will go our way.
I have many of these in my playbook:
The VWAP Hold, the Dip and Rip, the Morning Fader, and the Red Candle Theory (RCT) are a few I talk about almost every day during my Premarket Prep.
Why? Because we see each one of these almost every day before the market opens.
There’s one strategy I might not mention as often, but it’s just as high-probability as the ones I mentioned above.
So let’s get into it today…
If you’re a trader looking for clear, repeatable patterns that provide high-probability setups, channel trading could be your secret weapon.
It’s simple, visual, and most importantly, it forces you to follow a disciplined approach.
Table of Contents
What Is Channel Trading?
At its core, channel trading identifies price ranges where a stock moves consistently between support and resistance levels.
Picture it like a tunnel or a hallway—there’s a floor (support) and a ceiling (resistance), and the stock price bounces back and forth between these two levels.
This behavior creates an opportunity to buy at the bottom (support) and sell at the top (resistance), over and over again.
If you’re someone who wants to take advantage of range-bound or sideways markets, where stocks don’t break out but still offer reliable movement, channel trading could be perfect for you.
It’s also for traders that thrive on clear setups…
And who doesn’t love a clear setup?
How to Spot Channels on a Chart
Finding a channel is easier than you think but requires an eye for detail. Here’s the step-by-step process:
1. Look for a stock that’s moving sideways:
You’re not looking for trends (up or down), but instead stocks consolidating into a clear range.
2. Draw the channel:
Use horizontal lines to mark the support and resistance. The bottom line (support) shows where the price tends to bounce up, and the top line (resistance) shows where it typically stalls or reverses.
3. Confirm multiple touches:
To validate the channel, you want to see at least two or three clear bounces off the support and resistance levels. More touches is even better confirmation.
4. Identify the width of the channel:
The “width” is the range between support and resistance.
Logically, a wide channel offers more profit potential, while a narrow channel could have you fighting for small gains.
For example, Let’s say you’re looking at a stock that has a channel between $10 (support) and $12 (resistance)…
Every time the stock hits $10, buyers step in, and every time it hits $12, sellers take over. That’s your cue to start building your trade plan.
The Rules of Trading Channels
Trading channels isn’t about winging it—it’s about having a trade plan that protects your downside while maximizing your upside. Here are the rules:
Buy near support:
This is where you’ll look for a bounce. Don’t rush it. Wait for confirmation—like a candlestick reversal, a bullish pattern, or a volume spike that shows buyers are stepping in.
Sell near resistance:
Your goal is to take profits when the price hits the top of the channel.
Don’t get greedy and hope for a breakout without strong confirmation.
Keep your stop losses tight:
As with any strategy, always have a stop loss.
And if the price breaks below support or above resistance, the channel is invalid, and the trade setup is dead. Cut the trade quickly and move on.
Know when to switch gears:
The game changes if a stock breaks out of the channel, either up or down. Breakouts are explosive, and the channel trade turns into a breakout trade. Adapt quickly.
There is a way to play a breakout of the top, but it’s an aggressive trade designed for high volatility and suitable for seasoned traders…So be warned.
Why Channel Trading Works
There’s no need for complicated indicators or endless analysis in channel trading. The stock’s price action tells you everything you need to know.
It works because markets repeat:
Stocks are driven by supply and demand, and human behavior creates patterns that repeat over time.
It forces discipline:
Channel trading requires patience to wait for the right entry and exit points. Instead of chasing, you’re letting the trade come to you.
It gives you clear risk levels:
Support and resistance create well-defined areas for your stop losses and profit targets.
To successfully channel trade, you need a great trading platform.
My top pick and the one I use every day is StocksToTrade.
It features real-time data, charting, stock screening, technical indicators, and more.
And right now, you can get two weeks of both the STT platform and our news service, Breaking News Chat, for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $17!
My Final Thoughts…
Channel trading isn’t flashy, but it’s effective, and if you’re looking for a strategy that provides clear entries, exits, and risk levels, this could be perfect for you.
Here’s the bottom line:
- Find strong channels with multiple touches at support and resistance.
- Wait patiently for the stock to come to you.
- Stick to your trade plan rules and manage your risk.
Keep it simple. Keep it disciplined. And as always, trade smart!
Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
P.S
My colleague, Matt Monaco, is hosting a live event tonight at 8 pm Eastern and you don’t want to miss it…
You see, every once in a while, a rare set of circumstances comes together to create an opportunity you just can’t ignore—this is one of those moments.
Starting this week, we’re looking at the potential for billions to flow into a corner of the market most traders have overlooked.
Tonight, Matt will unveil his new “AI Breakout Code,” which will give you access to the biggest stock movers in that little-known market segment.
This could be your last chance to get in on the ground floor of this price action.
Click here to register for tonight’s “FINAL Aftershock” event!