Channeling can be extremely rewarding especially when there is a logic behind the points from where to start a channel and where it should end. This is the whole purpose of this educational series, to show how a channel can be traded and what are the implications of trading a channel when it comes to binary options trading.
If that is understood, then selling into resistance or buying into support is the way to go, and when trading binary options this means buying call options into support and put options into resistance.
Binary options is tricky especially because of the fact that a trader should find not only the perfect striking price, but also the right expiration date. Such a combination, price and time, is key in trading any financial product, not only binary options.
The example I am showing to you in the two parts of this project is referring to the eurjpy and the fact that a zigzag as a pattern, when it is part of a double zigzag as a complex correction is channeling really well.
Not only that we know beforehand when to buy call options, but we know approximately when the move is ending as well, so we know when to buy put options as well.
In order to project a channel one needs to identify a trend and a trend can be spotted if you see a series of lower highs being made and then market to break the previous lows. That is the beginning of a trend or how a trend is formed and the next thing to do is to draw a trend line from the first high, drag it through the next lower high and projecting it on the right side of the chart.
This is going to be the main trend line and it is going to be a great place to trade put options each and every time it is retested.
For building a channel, the trend line needs to be copied and pasted on the lowest level that came after the original first high and there you go a channel is being built. The classical interpretation is valid here in the sense that a bullish channel can be used for buying call options every time the lower side of the channel is being tested, while put options should be bought on a retest of the upper side of a bearish channel.
Another way to use a channel to your advantage is to look for the fifty percent retracement and use that level as a pivotal one, in the sense that once broken, it should be used as a support/resistance level for an option until the opposite side of the channel is being reached.
When it comes to Elliott Waves Theory, a channel can only be formed in corrective waves, in the sense that there are no impulsive moves that are channeling. Out of all the types of a corrective wave, the double and triple zigzag is channeling the most as they MUST end at the upper/lower side of the channel, depending if the correction is bullish or bearish. However, with Elliott Waves Theory there is a catch as market is not mandatory to move within the upper and lower side of the channel, meaning that price can travel below or above them, but it is mandatory to end at that resistance or support given by the opposite side of the channel. That being said, call options when market is testing the lower side of the channel and put options on the upper side are key.
What does it mean when price is breaking a channel after forming a double zigzag? Well, that is a very good question in the sense that market usually is forming an x wave that is supposed to break the channel and then retest it. If that is the case, expect a triangle to come as part of a triple combination even though triple combinations are pretty rare.
A strong trend always implies a channel even though it is difficult to build one if the move starts abruptly. This can be overcome with Fibonacci levels and a great way to find both Fibonacci levels within a channel as well as a way to find possible channels market is forming is to use the Pitchfork tool.
The Pitchfork is based on three pivot points that by the time are plotted on the screen, two equal channels are being projected on the right side of the screen basically showing three lines equally distant. The idea is to use the middle as the line that should attract price if the Pitchfork has been plotted correctly and the other two lines as support or resistance moving forward with your trading.