Monday, April 2, 2012

Late entries in a channel

I normally avoid late entries since they are usually dangerous. However, if you have a reason to believe an extended channel is setting up, for example due to the spike b7-10 you could look for mid-channel entries.

First you need to recognize a channel is in effect. In general if prices are moving in the same direction but most bars are overlapped except for a tick or two, you are probably in a channel. Unlike the move from b7 to b10, the move from b16 was clearly a channel.

A classic mid-channel entry is to fade the 1st breakout of a channel or 1chbo. This occurred possibly at b20. If you missed it, you can always fade opposing trend bars in any channel, the first one is the best. Today, the closest we got to an opposing trend bar was b26.

A first tail in a channel in the direction of the channel (b21) works very similarly to the first opposing bar. Its represents a pullback in a channel and an opportunity to buy other than the worst price.

Occasionally, a 1tf (b27) sets up which is usually a high probability trade. Care must be taken not to enter too close to end of expected channel move, such as the measured move of the length of the spike or the third push (b19,26,31).

Often, a strong channel will continue after a trendline break as a much shallower channel (possibly b37 to b67) so you should exit your positions but never fade a strong channel until the trend breaks. A prolonged horizontal movement such as today, breaks a trend but you could probably already guess around b36 or so when you get a series of dojis that the move was probably over for a while. Even so, SC days are notorious for continuing to keep moving till end of the day on terrible signal bars so caution is to be exercised when trading counter-trend.


  1. Hey Cad,
    Once again I have to complement on a great and very useful post, I really love your scenario-type analysis, very productive stuff!!

    I have so far not really understood how to work with spike and channels. You gave a clear definition now on a channel which really helps.

    But a very basic question; can the ensuing channel after a spike also be in the opposite direction of the spike? And how to separate the pullback after the spike from the actual start of the channel?

  2. Maybe I had the same "problem". The channel from b11 to b15 confused me as well.
    I then realized (a little later than Cad) the strength and bought above b23 (with a 8t stop) expecting a MM of the spike bodies.

  3. Unfortunately (after I took profits) I realized that we might test the H of a couple of days earlier. Which we did with b32.

  4. Cad, would you take the first H2 at b37 and the 20Gap bar at b57 despite we were already at around a 16pt move for the day?

  5. Was b2 an OR despite b1 being a TR?

    It too formed a W with b68/76 from Y and pulled back to the 20EMA on the 1hour chart and a long term up TL.

  6. Trader 33, usually, a spike setting up an opposing channel will first have an opposing spike. I have occasionally seen a spike setting up an opposing channel without an opposing spike, but they are rare.

    TD, when I see four or more dojis in a pullback I'm afraid the move is over and will look to exit, so I wouldn't enter on b37 or b57.

    b2 was a fBO of b1, it did not reverse HLC of prior day, so I wouldn't call it an OR. It did overshoot a TCL from the prior day on the third push so that may explain its strength.

  7. Cad why would shorting bars 4 & 5 be a bad FBO trade? Thanks

    1. fBO above b1 (which Cad considers a TR)