Albert Einstein said that the solution to any problem should be as simple as possible, but no simpler. This could be the perfect motto for any successful trader using Elliott Wave or Gann analysis and certainly something that every new trader or investor should heed. Novice traders sometimes search for the holy grail of trading by seeking to learn and combine as many technical indicators as possible, completely misdirecting their energy and analysis away from basic, time proven strategies.
Of course, there are numerous indicators available for an investor or trader looking to build primitive yet effective trading systems, however, something as simple as a price channel can yield relatively good results.
A channel trading system works equally well for bullish, bearish or neutral markets. If you haven’t already, ensure you have some technical analysis software (for excellent free software simply download the HUBB Investor Software from this site www.hubbinvestor.com) and you can follow through this system at home.
Channel trading is based upon the premise that a market will move between a trend line (also known as a bullish support or bearish resistance line) and a second line labelled the “return line”. As a market moves down, for example, you will see the price move between the bearish resistance line and the return line. This obviously provides buying and shorting opportunities as long as these lines hold. In the image below, you can see that the price failing to reach the return line also provides an early warning that the downward trend is no longer intact.
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Equally, a market can move in an upward trend, or even sideways, in order to illicit trading signals. Looking in the real market and regarding recent trading, it is noticeable that many of the financial institutions in Australia have been offering good opportunities from channel systems. Take Commonwealth Bank (CBA.ASX) in the image below
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CBA is clearly moving in a sideways fashion between support and resistance at around $39 and $44 respectively. Should CBA fail to reach the upper resistance line, it is possible that the lower support line is in threat. If the opposite occurs, i.e. the upper resistance line is touched and the subsequent retreat does not fall as low as the support line, expect prices to break this range to the upside.
The trading system and approach adopted will change massively should there be an increase in volatility. Using the breakout/ascending triangle based system taught by HUBB would then become the best method of profiting from the market. As with all breakout systems, volume becomes an important tool to ensure that any price surge is fully supported by a large number of participants.
As an aside and a point of interest, take a look at the On Balance Volume (OBV) for most of the Australian large capitalised financial corporations and you will notice an interesting trend, despite the lack of trend in the share price over the last 8 months or so.