One of the most important characteristic in technical analysis is channeling. Regardless if market is moving in an impulsive move or actually it is forming a corrective wave, or a complex corrective wave, channeling always shows a trader nice places to go and entry the market, basically places to buy call or put options. In an impulsive move, the 2-4 trend line should be placed on top of the end of the first wave and therefore you have a nice educated guess about where the 5th wave to come should end.
In a corrective move, channeling appears especially on zigzags or double and triple zigzags as they are the only corrective waves that resemble impulsive activity. In such a situation, buying call options in a rising channel by the time the lower trend line is tested, or put options in a falling channel when the upper trend line is tested is the logical thing to do.
Riding a trend
Channeling is appealing to any trader because in order for a market to channel, it means a trend already started by the time the channel was forming and this is the dream of each and every trader: to ride a trend. Riding a trend means buying the dips in a bullish trend or selling the spikes in a bearish one and what better place to have for the perfect striking price than the other side of the channel that it is proven to be support/resistance for so many times.
It should be mentioned here that because the channel is rising or falling, the levels for resistance/support are rising/falling as well and this opens the gates for a concept known as dynamic support and resistance. Scroll through our projects and articles here in Binary Options Academy section to find the one dedicated to this concept and see and read what it means and how binary options traders can benefit.
Building a channel is not an easy task. Make sure you understand that as this is a crucial thing. Channeling is not working with impulsive moves according to the Elliott Waves Theory so if you’re looking for an impulsive move but the move it is channeling then that is not an impulsive move and most likely it is a zigzag or a zigzag family pattern.
How to Know Which Pattern is it?
It’s pretty simple. Start labeling the waves and by the time you have waves one and two in place draw a trend line from the beginning of the impulsive move all the way to the end of the second wave and projected forward on the right side of the chart. The next thing to do is to copy that trend line and paste it over the end of the first wave and this results in a channel being built.
If the third wave you’re looking for is hesitating at the resulting opposite trend line and price fails to clearly break that level, then most likely the move you’re watching is not an impulsive move but a corrective wave and out of all corrective waves the one that fits into this category is the double zigzag or even the triple zigzag, even if the last one is pretty rare. It is not that rare on the currency markets where strong trends are forming but when trading equities or gold, oil, copper, cocoa, etc, one should be aware of that characteristic.
Trading Binary Options When Market is Channeling
Trading binary options when market is channeling is pretty straight forward and it doesn’t have to be a scientist to know how to ride a trend. What I would suggest is to divide the channel into two different and distinct parts and the way to do that is to take a Fibonacci retracement tool and measure the amplitude of the channel on its beginnings and then at some point on the right side.
Then, the next step is to draw a trend line and connect the 50% of the channel and project it on the right side. The resulting construction is a channel within a channel or a pattern within a pattern and one can highlight that by making the outer trend lines bigger than the inner ones.
The reason for doing this trick is that not all trends are the same. Some are strong trends and in such trends market has a difficult time breaking the 50% retracement of the channel, and some are “levitating” trends, meaning market is simply drifting higher and higher or lower and lower channeling in a perfect way.
To profit the most out of these situations, in a bullish trend I would buy call options with half the original amount planned to invest by the time price is retracing to the 50% of the channel, as that is a logical place for market to find support, and also I would buy double the amount planned, so being more aggressive, if the 50% level is broken and market is reaching the lower boundary of the channel.
Expiration date can/should be set taking into account the time frame the channel is appearing/forming and adapting it.