Channel Surfing

This entry is particularly valuable when trading a market that frequently

gaps. If you day trade, then you know that this is a real problem when
starting any trading day. When a market opens with a gap because of
overnight trading it frequently attempts to close that gap before doing
anything else. But this is in opposition to the established trend. With no
activity to really base a channel on you could be left out of a good part
of trading while you wait for some parameters to be established. This
method allows you to overcome this lack and enter more quickly.
Using a mini-channel break to enter a market works with another type of
confirmation. Rather than a prior channel break, the next entry simply
uses a prior trend to confirm the mini-channel break's validity.
Throughout any chart you are likely to see trends that pause from time to
time as if they ran out of steam and needed to stop and take a breather. It
isn't that the trend has really finished its run, but simply that it needs to
regroup before going further. These pauses will often form mini-channels.
One of the many examples avai lable is the flag pattern. Flags are short
lived and will often exhibit a tendency to drift in the opposite direction
of the market trend, thereby creating a mini-channel. Usually this mini
channel will lead to a continuation of the prior trend. Unfortunately, a
trend can also have a dying top where it slowly drifts into a reversal and
will exhibit similar characteristics, so it usually best to wait for the market
to tip its hand before committing to a trade. This tip or signal to enter is
found in the break ofthe mini-channel. Although no prior channel breaks
exist that you would normally use as confirmation, the prior trend itself
serves the same purpose. The only requirement is that both the prior trend
and the mini-channel break be in the same direction. An example can be
seen in figure 2-5.
It doesn't matter whether we are talking about a channel break or a
trend, for a mini-channel break to be valid they must both be in the same
direction. If the market was in an up trend just prior to the flag and then
the flag broke downward, then this would not qualify as a valid signal. It
is possible for such a move to qualify under the normal entry rules, but
that would then depend on a larger channel and the overall trend. Do not
confuse the two methods of entry. Aside from this and the added risk,
you will certainly find plenty of opportunity to use mini-channels in your
trading. They frequently show up within any market providing some great
trading opportunities.

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