Channel Surfing

as one, they make the whole stronger. In like manner, price will naturally
attempt to connect to itself in some form or fashion.
Entering as price draws near to a prior channel line is often an ideal
entry because the risk is small and the profit potential high. But this still
doesn't guarantee a profitable trade. Unfortunately, it is also not
uncommon for a market to excessively drift, paralleling a prior channel
line for quite some time before actually breaking in the direction of the
new trend. This is one of the quandaries of trading that despite breaking
a channel, price can still exceed a prior high or low and continue in its
prior trend's direction, resulting in a loss. Only after a new trend is
clearly established do you know for sure whether an entry was good or
bad. Obviously, you want to get in at the very best possible price, which
requires an early entry. But you also don't want to take a heavy loss or
do the opposite, get too nervous and jump out too soon, missing the
trade entirely. So how do you know when a drift is just a minor delay
in a new trend or a failed break that threatens a major loss?
While it is possible for a market to develop a double top or bottom or
even slightly exceed prior highs or lows and still reverse, the odds change
dramatically when it does. It is better to take a small loss than to risk a
large one. Once a market breaks a prior high or low, the move can be
extremely fast. The slippage can be very large if you hesitate too long.
is a sickening feeling to have the points rack up against you whi le
H
you desperately try to get out, but are unable to find someone to take the
other side of your trade. If there is no indication of a channel that will
provide support or resistance in close proximity of the previous high or
low, then the high or low has to act as your limit. Multiple attempts at
this level or actually exceeding it will require an immediate exit.
This possibility emphasizes that the best approach for a beginner is usually
to wait until the small channel is actually broken before entering. But
entering is often a matter of taking stabs at a market, getting out of the
ones that become questionable and sticking with the trades that show signs
of paying off. A prior channel line acts as an indicator of what will unfold.
Even at the expense of exceeding a prior high or low, this channel line will
normally be the limit of price's progression and once it is reached price
should show clear signs ofreversing direction. Ifprice reaches this point
and fails to reverse quickly, the trade's success quickly fades with it.
An important early warning that a reversal may fail can be seen in the price
action immediately fol lowing49the break of the prior channel line.