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It is generally considered unwise to dabble with trading e-mini contracts when they are in a consolidation channel. I think, by and large, that this is some good advice because trading in channels can be treacherous and result in substantial losses. As a longtime trader though I relish the opportunity to channel trade e-mini contracts. Early in my career, nearly 25 years ago, I had an unusual mentor who lived to trade in the channels and was kind enough to share his technique with me. First and foremost, it is essential to evaluate the type of channel that has formed and you are considering trading. Some channels are very tight and have extended wicks in their candlestick formation. This type of channel is called “barbed wire” and should be avoided at all costs. Further, channels that are less than 8 ticks in any contract are usually impossible to trade effectively. However, a 12 tick channel will make my heart beat fast as I see potential trade set ups in these types of channels. There is one caveat, though; the price movement in the 12 tick channel must not be roaming along the center line. I generally put up some Bollinger Bands and watch the price action ricochet from the top line of the Bollinger Bands to the mid-line or bottom line. Now, you have your potential set-up in place. The technique is relatively simple; when the price action pierces, or better yet, breaks out of a Bollinger band, look to take a trade in the opposite direction. This trade is a leap of faith based on several assumptions: • Breakouts from channel consolidations notoriously fail. The beauty of this trade is that many small investors set-up for a channel breakout 4 or 5 ticks above the top or bottom channel line. Generally speaking, the small investors are picked up in the trade and then it begins to slide back into the channel. Most smaller traders set their stops at 10 or 12 ticks so when the price action gets 5 or 6 ticks back in the channel….the bottom drops out. This trade is very effective. After the trade entry, I set my stop loss at 5 ticks. I want to protect against a real breakout or breakdown should it occur. As I said, breakouts or breakdowns from channel consolidations generally fail, but I still want to protect myself if an unlikely breakout or breakdown should materialize. • This trade is especially effective on the YM contract from 11:30 AM CST to 1:30 PM CST when the smaller traders are dominating the market and the larger traders are in the stand down period. • This is a trade where you are competing for capital against the small traders not the large traders, which is much more difficult. Working on the assumption that breakouts from the consolidated channel generally fail, it is the small traders who are preparing for a breakout that generally end up on the losing side of the trade. While this training technique is not for the faint of heart, I have used it successfully for many years and continue to do so. I will admit that taking a trade in the opposite direction of the price movement can seem a dangerous tactic, but experience has shown me that breakouts from consolidation channels are infrequent. I should also point out that it is not unusual to get a little upside down, say two or three ticks, before the price action begins to move back into the channel. In summary, I have stated that trading in consolidation channels can be treacherous and risky business. That being said, I delight in trading in these channels, despite some of the obvious risk. Over the years, I have an enviable success record in channel trading. In short, it is possible to trade channels with proper technique and tight diligence. Real Live Trading Doesn't Lie. Spend several days in my trading room and see if you can benefit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by clicking here.
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