Price Channels: Buy Dips and Sell Rallies


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Video Transcript:

Hello, traders. Welcome to the fourth module of the Advanced Technical Analysis Course: Chart Analysis. And in this lesson, we’re going to teach you how to buy dips and sell rallies, and how to take profit from those trades using price channels. Now, first of all, you need to understand that price doesn’t move in a straight line when it trends. Price moves in waves: directional waves and correctional waves. When price action is clean enough, and the trend is strong, channels will form. These price channels give the best opportunities to jump in a trend and trade with the trend. Remember that trading with a trend is easier than countertrend trading, and this is why we’re going to use these correctional waves for opportunities to jump in the trend.

Now, the first thing we need to learn is, how to buy dips. We buy dips in up moves. Buying dips means that, in an up move, price will correct to the opposite way. When price is corrected to the down side, we call it a dip, because the price is dipping. In this case, we’re going to buy those dips. The idea is to buy into weakness on a corrective wave to trade with the trend. Entries in up channels are at the test of the channel’s support, and we take profit when price tests the channel’s resistance. So when price is trending in an up channel, we are going to wait for price to dip into the channel’s support for us to get a buying opportunity, and we will take profit when price hits the channel’s ceiling or the channel’s resistance.

Now, how to sell rallies? We sell rallies in down moves. The idea is to short into strength and trade with the trend. Entries in down channels are the test of the channel’s resistance, and, of course, we take profit when price hits the channel support. So this is the opposite scenario. This is when price is trending in a down channel, or when price is trending down. We are going to wait for price to rally into the channel’s support, or to correct up and hit the channel’s resistance and then, we will get a short opportunity and take profit when it hits the channel support.

Now, let’s go through some examples so we can better see what we’re talking about. Let’s take the example of an uptrend where we are going to buy dip.

Buying Drips in a Channel

 

Now, price is trending inside this channel, and as you can see here, we are in a clean up move. We have hit the channel’s resistance. We are not going to go short here, because with this method of trading, we are going to try to trade with the trend, because it is more effective, it will make you more money in the long run, and because it is easier. So here, price has hit the channel’s resistance, and then dips and tests the channel support right here. As you can see, price continues to the upside and tests again the channel’s resistance. So when price is trending inside of a channel, it will go on a directional wave, then a correctional wave, then a directional wave, and then a correctional wave. How do we trade this? So price is trading in an up channel. Price correct and dips to the channel support, like we see right here. Then, the long entry is after the rejection of this support and continuation to the upside.

You need to use candlestick formations and chart patterns for you to get confirmation, and here, we have a dodgy that tests the channel support, and then a blue bar that gives us the continuation to the upside of the move, and the rejection, of course, of the channel’s support. Here, we have the long entry and, of course, the stop loss should go below the previous low and below the channel’s support, because if price changes direction and breaks with the channel support, and breaks with this low right here, our long idea will no longer be valid, and we must get out of the trade immediately. In this case, it didn’t happen, and we hit our zone, where we manually take profit when the price hits the channel’s resistance right here. As you can see here, the risk-reward ratio on these trades is phenomenal. Here, we are risking 20 bps in order to make 100 bps. That’s a 1:5 risk to reward ratio, which doesn’t come up very often. So when you have a price channel, wait for price to hit your entry area, and then trade it.

Selling Rallies in a Price Channel

Now, let’s see the opposite scenario, where we’re going to sell a rally. Price is trading inside this down channel, and as you can see here, we have hit the channel support, and we are ready for a corrective wave, in my opinion. We have the corrective wave, and price hits the channel’s resistance. Now, we need to wait for a confirmation of the rejection of this resistance and a continuation to the downside for us to be able to trade it. Right here, we have the test of the channel’s resistance, and in this case, we do have a continuation of the down move inside the channel. Now, how do we trade this? Price is trading down a channel. Price corrects and rallies to the upside, of course, price rallies when it’s moving to the upside, and hits the channel’s resistance. The short entry is after the rejection and continuation to the down side. Again, here we are going to use candlestick formations and the chart patterns to give us a rejection and a continuation of the move.

In this case, we have a dodgy and what looks to be an evening star right here. So we have an entry right at the channel’s resistance when this candle closes. The stop loss should go above the previous high and the channel’s resistance, because if the price reverses and breaks with the resistance and this high, we are shifting trends, and we should no longer be short on this asset. Of course, we follow price and manually take profit at the test of the channel’s support. Again, here, we have an amazing risk to reward ratio, so you need to be patient, you need to be disciplined, and you need to understand that when price is trending, you will want to trade with the trend. So draw your channels, wait for price to hit your entry zones, and manually take profit. If you planned your trade, you should trade your plan, and if your plan was to take profit when price hits either the channel support or resistance, you should do so.

Adam

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