Channel Trading and Range Trading Guide

Stock Market Range Trading
I’ve Never Seen a Range Like This… Shame


12 September 2017: Channel Trading

The FTSE 100 index has been trading in the 7,300 – 7,450 range for the last month and I do like channel trading aka range trading.

FTSE 100 Chart - Channel Trading

I’m not going to trade this one yet but if I was, and I thought the overall market would move higher, then I’d wait for the index to drop to the bottom of the channel and have a small buy.

Likewise if I had a negative view of the FTSE 100, I’d wait until the index was at the top of the channel and short it.

I wouldn’t try to sell at the top and buy at the bottom.


Channel Trading in Just One Direction?

I know, I know, I know.

Look at the FTSE 100 chart above. It’s a thing of beauty. Just sell at the top and buy at the bottom. Simple!

Err… trading is rarely that simple.

The problem with channels is that once they are nicely set up like this, and even I can see them, then they don’t last for long.

The range won’t hold and you’ll soon have a losing trade if you trade in both directions.

That’s fine if you’ve had a number of winning trades first etc. But your first trade could easily be made at the same time the channel breaks.

Therefore, for my P&L and my own personal trading psychology… and to help me keep my fingers off the trade (one of my big trading problems) I want to have medium-term view on the direction of the market. Again:

  • trending_upIf I have a positive view of a market then I wait until the market is at the bottom of the channel and buy it
  • trending_downIf I have a negative view of a market then I wait until the market is at the top of the channel and short it
This means that when the market breaks out of the range then hopefully I’m still on the right side of the move.

Yes, I’m losing out on half of the “trading opportunities”… but I’m also markedly reducing the risk of a loss making .

(Also, from personal experience, I’ve normally made a mess of trying to achieve the holy grail of shorting the top and buying the bottom).


Why Not Trade?

The chart does look good for some range trading but I don’t have a strong view on which way the FTSE 100 will go when it breaks out.

Having said that, if the market drops to 7,300 then I will take another look at this.


Small Stakes with Channel Trading

I keep trades small with channel trading,

Again, you are probably setting yourself up for a losing trade and you relying on the market to stay in a range… that doesn’t fill me with confidence.

It’s a question of small stakes or no trade.


Upwards and Downwards Channels

Channels are often upwards or downwards, not just horizontal.

  • infoCase Study: There is a nice example in our Snap spread betting guide on how we used channels to help us successfully trade Snap Inc.
Note, with Snap I felt the market would drop and so any break of the top of the channel was a clear warning signal.




AuthorAlex Turner

Senior Editor, SpreadBetMagazine

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