RE "...buying and selling becomes so simple."
Well... yes and no. :-)
The idea starts out simple. Buy near the bottom of the channel, and sell if it breaks the support line. Well enough.
Buying near the bottom of the channel has the great advantage that you can put your mental stop just below the channel, and not lose much if it falls through. That's why I don't buy after the stock climbs back into the mid-channel. A stock will often turn around and re-test the support -- and it might fail. If you buy 20% above the support, you will lose more than 20% before you sell.
Now remember, you're buying this stock when it has come down. That takes at least some guts. But then, if the stock does fall through the bottom, you have to turn around and sell it the next day. Initially, I found it difficult to call my broker and sell so soon. Silly pride I guess. My solution was to transfer nearly everything to an on-line broker. Or you could just not care what your broker thinks. :-)
[Yes, I still have a full-service broker. We trade advice, and he gives me shares of IPOs. But the majority of my funds are in two different online brokers. Worse yet, I invest my mother-in-law's account, and she has both a broker and a trust attorney who look over my shoulder.]
You still need to overcome your own resistance to admitting mistakes. It's always tempting to make excuses for the stock. "The whole market was down that day." "There's no solid fundamental reason for this stock to go down." "The market is over-reacting." "If I draw that line a little lower, the stock didn't really break it." etc.
Then there's the temptation to get really greedy. If these channels are so good, why not sell at the top and buy back at the bottom? Well, I do that some too. But the stock will fool you. Just because it's hit the top, doesn't mean it's going back to the bottom. Sometimes it goes part way down and then back up. You can miss out on a lot of profit by selling at the top. You can also save a lot. And you can play options games... I haven't got this part entirely figured out yet. :-)
Anyway, the best thing about this method is that it tells you what price movement is just noise (inside the channel), and what's significant (breaking the channel.)
Oh yes. I have to mention -- there are channels at different time horizons. For example, within a long-term up channel, a stock might be in a short-term channel climbing to the top, or in a short-term channel falling to the bottom.
And finally, these lines don't draw themselves. There are ways to lie to yourself when drawing them. "Oh, that point doesn't matter. It didn't close below there." etc.
[Old joke: Behind every successful man stands a surprised mother-in-law.] |
