Channel Surfing

If price fails to reach this level it would be an early sign that the trend is too weak, giving you an opportunity to exit before it falls back into a losing position. Additionally it can help you to avoid excessive draw down and open up the opportunity to profit twice, taking advantage of multiple moves covering the same territory. If the distance between the two channel lines is great enough, then it may be more profitable to exit near the opposing channel line (even if it is an estimated one) and reenter when price comes back to your original channel line. Because Channel Surfing is so flexible, you can adapt it to all markets, time frames, and market conditions. Figure 1-6 demonstrates how Channel Surfing can be adjusted for a market that is accelerating. This is an important aspect of Channel Surfing because it allows you to always be one step ahead of the market. Initially, a trend can develop a wide channel that narrows down as it accelerates. This acceleration will draw price away from the inside line, diminishing the value of that line. This in turn will require an adjustment of the inside line to match the new parameters, even if price shows no signs of altering the outside line. An adjustment is made by drawing a new line to replace the outdated one. So as a market narrows, you in turn narrow down your channel line to match it and repeat this as often as necessary. Because trends have a habit of repeating this process several times before the trend actually ends, you frequently end up with a fan like pattern. The adjustment of a channel line is a one-way affair that continually tightens your stops as the market accelerates. Each new fan line becomes the only inside channel line you are concerned with because as soon as the tightest angle is violated, you exit. Handling market acceleration this way allows you to closely monitor your trading and protect your profits. To summarize what we have covered so far; two lines are drawn to enclose price activity and when price violates either of these lines you exit your trade. In market acceleration, draw additional new channel lines that form a fan pattern and exit when the tightest of these lines is violated. These rules for exiting will help you to trade more successfully. But for these rules to be of any value, we still need a way to enter a market in the first place. So this is the next area that we will consider. The battle between buyers and sellers through the bid/ask spread is nothing more than the balance of power at work and the principles of this struggle extend to a greater level far beyond this momentary spread. The bid/ask action gives us our first glimpse as to who has the upper hand. But unless you are a floor trader exploiting the bid/ask spread, it really is of little use for determining which way a market is leaning. The spread is just too narrow and short lived for most trading. So our view of this battle has to extend to higher ground, the battle lines of channel lines. In any advancement, up or down, it is the line that is pushing the market (the inside channel line) that is key to the trends design and survival. This is why an exit is always called for when the inside line is broken, while in contrast the outside line has some exceptions. When there is a distortion in the parallel of the two lines the culprit is usually the outside channel line because this is the variable in the equation. But even variables have limitations. If the outside line advances too fast for the inside line to keep up then the market will exhaust itself. The inside line’s help is needed to sustain any move. Such an advance in an uptrend would demonstrate that the sellers are over inflating the value by demanding more and that a few buyers are even giving into those demands. But not everyone is so willing, shown by the fact that the inside line continues to hold its position. Buyers who give in so willingly are usually just desperate and eventually these desperate buyers will dry up, ending the over-inflated run. When the outside line begins to snap back the gap alone between the two lines will create a sellers panic and cause prices to tumble down in haste. As it is true with the bid/ask spread, the alignment of these two lines define who has the upper hand in a market, the buyers or the sellers. In fact, it is actually an extension of the bid/ask spread itself and so contains the extremes of what each believes they can get from the other. The advantage of channel lines is that they show greater depth of the battle between both sides and aren’t limited to just a few minutes sampling of trading. So a history of the battle develops and the battle plan becomes obvious. The key to this battle is the inside line because it is the base that everything works off of. When the outside line begins to accelerate the important factor will be in how the inside line chooses to respond. If it fails to accelerate as fast as the outside line then the move has a serious problem and an imbalance between the buyers and sellers exists. The common theme throughout all the configurations illustrated is that if both