A Simple Pattern Even Novice Traders Can Recognize (And Profit From)
One simple pattern can help you easily book winning trades in a trending market.
You don’t have to be a professional trader to take advantage of this set-up. You can even use the pattern we’re about to show you if you know next to nothing about technical analysis. All you have to do is recognize the key features and respond to the pattern’s clear buy and sell signals.
The pattern is called a trend channel.
What Is A Trend Channel?
A channel is easy to spot. It consists of a trending stock flanked on either side with a high and low range. You can see this in the example below with Nvidia (Nasdaq: NVDA) in 2020. Following the Covid selloff, the high range (resistance) is marked by a blue line. The low range (support) is marked by the red line:
Buying channeling stocks makes good sense in a bull market. All of the important ingredients are in usually place to execute a successful channel trade.
First, the market is trending higher. It’s always in your best interest to take the path of least resistance when trading. So if you’re planning to go long, you want the overall trend moving in your favor. Since stocks are generally moving higher in a bull market, trading a rising channel will sync your buying with the broad market.
Next, a pullback could expand your trading options. The best time to buy a channeling stock is when it bounces off the lower end of its trading range (the blue line in our example). As the market retreats from overbought levels, many of these channeling stocks follow suit. With more prices testing channel support, you have a variety of channeling names that are flashing buy signals.
How Traders Use It
Buying a stock as it bounces off support is an ideal low-risk trade. If support fails to hold, you can exit the trade with minimal damage to your account.
Finally, a stock trending higher in a channel could be setting up for an even bigger move. A stock that is exhibiting a channel pattern is already trending higher. But if the stock breaks above resistance (the red line in our example) the uptrend could accelerate. Old resistance becomes new support, and the stock moves even higher. Using the channel, you should be able to time your buy to maximize gains.
One of the main benefits of channeling stocks is that they give you clear-cut buy and sell signals. Channels are also useful for traders with different goals. For example, take a look at the buy and sell points noted with the arrows on our next chart.
If you’re a trader who is comfortable using shorter time frames, you can use the channel to make multiple trades. You can buy at support (blue arrow) and sell at resistance (red arrows), taking profits along the way. Or, if you prefer to hold positions for a longer time frame, you can act on the initial buy signal, and hold the stock for the duration of the trend.
In this example, assuming you didn’t have the foresight to get in at the bottom, a buy signal on NVDA at around $90 would have led to significant profits before the channel was breached at around $125. You would have left some profits on the table, of course, but this is an example of a significant, easy short-term gain from such a simple pattern.
Action To Take
You don’t need any fancy pattern recognition software to find the perfect channel trade. You can go to virtually any free online stock screener or charting tool to search for trade candidates. It can be as simple as searching for stocks within 5% of their 50-day or 52-week high. Or, you could search for stocks that are trading above their short, medium, and long-term moving averages.
The key is finding stocks that are trending higher. Then, it’s just a matter of scanning the charts and finding the best looking channel setups. No matter how you search, you should have no problems finding low-risk, high reward channel trades.
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