The Right Way to Use Lines in Trading (Part 4)
04/16/2009 12:01 am EST
I have been working with lines as my main trading tool for more than 38 years now. Lines are simple, lines capture the probable path of price well, and lines work over and over and over. My favorite lines are the three parallel lines that make up Median Lines, but I work with all sorts of lines in my trading.
Next we'll look at a simplified cousin of the Median Line: Parallel line channels.
When you look at someone's charts of price that have parallel channel lines on them, you always have to know where the pivots used to form the channels reside, or else you may be looking at trades that weren't possible! Remember, parallel channels take three pivots, two to form a trend line and one that is then used to form the parallel line. I have clearly marked the three defining points on each of the parallel line channels on this chart, and trades can only be made after the defining pivots.
I was able to find a profitable trade using parallel channel lines on this market swing, but the great breadth and depth of the first half of the swing made it difficult to “catch a ride” lower. And once price got into its congestion phase, the channels just didn't come into play, unless I narrowed them so much that any position taken would soon be stopped out in a “wash and rinse” type move.
Don't let my inability to find many quality trades in this major swing turn you off to parallel channel lines, however. If you learn how to use them, apply quality entry and exit setups, always use solid money management and a good risk reward ratio, you can make money trading with parallel channel lines.
More tomorrow in Part 5.