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Narrow Sideways Channels Introduction

Video Transcript

In this example, I want to talk to you about another very popular reoccurring price pattern. That is the Narrow Sideways Channel.

Now, we've been talking to you about trends. Trends are markets that move down or move up for a period of time. Now, there are 3 trends that a market can do. It can do an uptrend, it can do a downtrend, or it can do a sideways trend.

Now, a sideways trend is generally a hesitation or a stall in the market. It doesn't know at this point whether it should go up or down, so it's hesitating, and it's going sideways. We call them narrow sideways channels.

You'll see right here in this Crude Oil contract, that we have a nice little narrow sideways channel, right there. So, the market is not trending up, it's not trending down, it's just going sideways. Now, as a trader, you don't make money when markets go sideways. So, you don't generally want to be in a sideways market. There are times with Options, where a sideways market is okay for you. But, that's pretty rare. Most of the time, you want a market to be trending nicely. You want it to be going up strong, or you want it going down strong.

When a market goes sideways, this is actually an opportunity for us. Because as a hesitation, we don't know whether the market is going to go up, or going to go down. But we don't really care, as traders, because we know we can make money, either way. If the market goes up, we buy. If the market goes down, we sell. So, what a chartist will do, they will use a narrow sideways channel as an opportunity to get into the market.

So, we will place orders, look for narrow sideways channels, and we will place orders to buy, on a break above the ceiling, or the resistance point of the narrow sideways channel. Or we will sell, on a break down on a break of the support level, or the floor of the channel. So, as a market goes through the channel, if it breaks above it, we want to buy. Indicating that the market has a tendency to go up, or if it breaks down, we sell. Because we want to buy on a break down and out of the triangle.

Now, you'll want to keep in the back of your mind, too that narrow sideways channels are also considered to be what we call continuation patterns; hesitation in the market, or in a trend. So, if a trend is in a strong downtrend, and suddenly you have a hesitation pattern, or a narrow sideways channel, for example- that's generally just a hesitation in the market, just before the market continues in the original direction. So, you'll want to keep that in mind, that markets do have tendencies to continue in their original direction. You know, a force in motion has a tendency to stay in motion. So, if a market has a tendency to go down, it's going to have a tendency to continue down, even through a hesitation pattern, or a sideways channel.

So, on this point, narrow sideways channel, we would sell on a break below it, or a buy on a break above it. Let's go and look at another couple more narrow sideways channels.

Let's look at gold, now this is a very long narrow sideways channel. Gold and silver have a tendency to cause these long channels that go sideways a lot. They're not as strong trending as things like corn and wheat. They like to go sideways, a lot. But they do have opportunities to get in and out of the market, based on these channels. So, it'll go sideways for awhile. You can watch it, and it'll break out. This would be a buy signal, because it just broke above this level of resistance.

Remember markets have a tendency to move, they can go up or down. So, as it comes back down into the channel, that's okay; it's not a problem. If you are a trader, you would have your Stop Loss Order, or order to get you out of the market, if the market came back down, below that support area. We'll talk about risks and rewards, and Stop Loss Orders, and those kinds of things further on in the lessons.

But this is a break out, right here, of a narrow sideways channel. As the market moves up in Gold.

Let's go look at Silver. These are good trending markets, that go sideways quite a bit. So, let's see- this would be one, this got kind of wild in there. Let's see- maybe right here at this end would be a nice little channel. Look, it comes back in here in this area here. Kind of broke out, and came back into a channel there. But let's just look at this little in channel, right there. As we step, it's breaking up and out of our little channel. So, we could have extended that back the way we had it. We see a little false break out, right there. You have to be aware of false breakouts. Like any good quarter-back or running back for a football team, a market will have a tendency to fake one way and go the other. So, I want you to always keep in mind that markets in these little narrow sideways channels will often times do what we call a fake breakout. They'll breakout and then they'll retrace and come right back into the channel again. Or they'll breakout hard in one direction, then they'll turn around go the other direction. So, you always need to be mindful of these little narrow sideways channels. Sometimes they have these false breakouts.

So, what you want to do, is you want to go back and get your charts, look through, you know 100 charts, again. Find these little narrow sideways channels. Look at them, see how many of them have these false breakouts. How many of them fake one way and go the other. See if you can identify patterns in which that happens, and how you would trade those situations.

This is a nice little break out at this channel, here. Little narrow sideways channel. If we were trading this market, we would buy on a break above this one. We would of course be long in the market, right now. So, go back, get your charts, find narrow sideways channels, analyze them, take a look at them. Get very familiar with them, because they're very strong, one of the strongest patterns we have for getting into markets.

Remember: They are continuation patterns, or considered continuation patterns; so look at them in that light, as well.

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