From the September 01, 2012 issue of Futures Magazine • Subscribe!

Trading channels for profit

Markets are either in trends or trading ranges, and trends can be strong or weak. When they are strong, the market is moving clearly and quickly to a new price. There are several large trend bars or a series of ordinary trend bars, and there is little overlap between adjacent bars. This is the spike phase of the trend.

The market then transitions into a weaker trend, called a channel, where there is evidence of two-sided trading, sometimes evidenced by more overlap between adjacent bars, prominent tails, pullbacks and trend bars in the opposite direction.

Eventually traders in the opposite direction become strong enough to control the market, and it evolves into a trading range. This is followed by a breakout in either direction and the process begins again.

Different trading strategies work better in certain market types. When the market is in a trend, traders stand to make more money from swing trading than from scalping. When it is in a trading range, most breakout attempts fail, so scalping usually is more profitable.

Get scalped

A scalp is a strategy in which the trader intends to take a quick profit. For example, if a trader bought a pullback in a bull trend in Apple when it was around $600, the trader might use a $1 profit-taking limit order while risking $1. Many traders would do this using an order cancel order (OCO), using a protective stop $1 below the entry price and a profit-taking limit order $1 above; once one order gets filled, the other is cancelled automatically. 

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