Price Channel system is very easy to learn, but requires a careful approach. Price channel appears quite often as the markets mostly are not in trend, but within the price band. Accordingly, the formation of the channel can be often observed during the range period.
If you like this strategy, you might also be interested in this Darvas Box Strategy
How to use Price Channel System?
The most important thing in this system is to build a proper corridor. At the initial stage it would be better if this range is obvious.
Take a note of the screenshot. It is quite hard not to find a range, which is formed between the intermediate levels of support and resistance. As soon as this range appears, you can determine the levels with the help of three marks (two at the top and one at the bottom).
Once you build a channel, you'll see that trading in it is really quite simple. Options should be bought when the price reaches one of the marks and does not break it, but bounces inside the channel.
One could say that this is one of the simplest systems. When the price approaches the upper border of the channel (resistance level) you should wait for a downward reversal, and then buy the "Down" option. And vice versa - when the price approaches the lower limit of this range, you should wait for a reversal and then buy the “Up” option.
Why should we wait for a reversal? It is simple. At some point the price can break one of the boundaries of the channel. Therefore, if you prematurely buy the opposite direction option, you will incur a loss.
- Upper Channel Line: 20-day high;
- Lower Channel Line: 20-day low;
- Centerline: (20-day high + 20-day low)/2.