Price channel break and a trading flag

For swing trading I use price channel breaks and flags for both my buy and sell signals. A channel price break signifies a change in trend. A buy occurs when prices are dropping in a down trending channel and then something happens causing the price to break out above the channel line. Below, I have an example of a price channel break and a trading flag which is a buy.

Price extremes form a shallow up trend channel after a large spike up at the beginning of this chart. This uptrend channel is shown in blue. Up trend channels are drawn by placing a rising line between the two highest highs and then drawing a parallel line from the lowest price that occurs between them. A price drop below that parallel line is an indication that the trend is ending. Often, a certain percentage below that channel is used as a stop loss price where your stock would sell to limit the amount of profit you give back.

Once that channel is broken, and two down sloping lows form on the chart, a down trend channel can be drawn. This channel is in red and is drawn with a line between the two lows and a parallel line drawn from the highest price between those lows. Prices broke above the channel three times before giving up and heading down. After an up channel break down, I ignore these first price break outs from the new down trend because they are only testing the break down. There is a time when they are buys, but it is rare and not the subject of this post.

After prices break lower again, a new, wider, and more sustainable down trend channel has formed. (shown in green) This is the one we want to see prices break out of for a buy and, after several days, that is what happens. After such a break out, a flag nearly always forms. The flag, shown in orange, is ideal for end-of-day trading because it rests right on top of the green channel and rests on the support of an old low, in red. This flag is what this blog and my website are named for. A buy at the end of the flag day is an excellent entry point and the next morning prices gap higher and head up.
There are times when the flag straddles the down trend line, but still rests on an old high or low, and other times when the flag doesn't form until after a very large rise. These can still be bought if they rest on support.
This type of buy has very limited risk because a stop can be placed just under the old low, often risking less than one percent on the trade.
Happy trading.

Why I always use sell stops

This morning gold fell $70 an ounce in one hour. Gdx fell $2.55 at the same time and went down even further a little later.
Yesterday, both GDX and HUI, the gold bugs index, closed above their 200 day moving averages, resulting in heavy buying (and selling) at the close. My computer shows over one million shares of GDX changed hands in the last minute of trading yesterday. Everyone who bought then, and didn't set a stop, is now down 3.5%.
What caused this market mayhem? Ben Bernanke spoke to Congress.


Whatever you are trading, you should enter a stop loss order to limit your risk when you are not watching. The stop loss order will sell your stock as soon as the price gets down to a price you have determined ahead of time. This takes the emotion out of your decisions to sell and helps you sleep at night.

Even if you use a full service broker (although I'm not sure why a trader would not use a discount broker) you need to make sure they physically set a stop loss order for you rather than just watching and hoping they can get to it.

So how do you determine your stop price? Trend line support, old highs, and old lows are all valid places to put your stop. Do not put the stop right at the line. Give it a little room so a minor violation of support will not send you out at the low. How much room will be determined by experience. Look back and see how much support was violated on other occasions, but still ended up holding.

Happy trading.