How to Trade E-mini Price Channels

Trading Price Channels is a dynamic yet easy to learn form of trading that relies on the markets natural tendency to trend. It is a type of technical analysis that provides ideal areas from which to buy and sell. Price Channels also show you where to put your stop-loss and where to take your profit. Here are a few of the best ways to take advantage of information the market freely gives you.

STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A “LIMIT MOVE”, IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

In technical analysis, a Price Channel is defined by two parallel trend lines. The upper trend line connects price highs and the lower trend line connects price lows. Here are examples of 3 types of Price Channels.

Flat - Ascending - Descending

Current Ascending Price Channel in the S&P 500 Emini Futures

Getting Started

To create a Price Channel follow these easy steps:

  1. Find a swing high or swing low to start the channel.
  2. Find another swing high or low and connect the tops or bottoms.
  3. Copy and paste the trend line you've just drawn.
  4. Grab the parallel trend line and drag it to the top or bottom of price.

There are 3 types of channels you will create as shown in the first diagram.

Bull or Ascending channel — higher high and higher low.
Bear or Descending channel — lower low and lower high.
Flat or Horizontal channel — horizontal highs and lows.

The channel is created by price moving between the upper and lower trend line. The upper trend line represents resistance and the lower trend line shows support. Price channels with upward slopes are considered bullish and those with downward slopes are considered bearish.

In a bullish price channel the primary trade is to buy when price reaches the main trend line support. In a bearish price channel the primary trade is to sell when price reaches the main trend line resistance. Other forms of technical analysis can and should be used to confirm signals.

Trend Line: It takes at least two points of support or resistance to draw the primary trend line. In a bullish price channel, the main trend line extends up and at least two swing lows are required to draw it. For a bearish price channel, the primary trend line points down and at least two swing highs are required to draw it.

Channel Line: The line drawn parallel to the primary trend line is called the channel line. The channel line represents support in a bearish price channel and shows resistance in a bullish price channel. Once the primary trend line is established you only require 1 swing high or swing low to create the channel. However, until you have the second confirming swing high or swing low it is still a work in progress.

Bull Channel: As long as price continues to advance between the primary trend line and the parrallel channel line, you have a bullish trend. The initial warning for a trend change happens when price falls short of channel line resistance and/or a white candle is painted using the CF_TC Trend Change Indicator. If price breaks below the primary trend line and holds on a pull back, the bullish channel is no longer valid. If price breaks above channel line resistance and holds on a pull back, this is a very bullish indication and will increase the width of the channel. Once you have a new swing high in place you simply drag your parallel of the primary trend line to accommodate the new high.

Bear Channel: As long as price declines and trades between the primary trend line and the channel line, the trend remains bearish. The initial signal for a potential trend change happens when price fails to reach support at the channel line and/or a white candle is painted by the CF_TC Indicator. If price breaks above the primary trend line and holds on a pullback, the bear channel is no longer valid. A break below the channel line that holds on a pullback is bearish and indicates an increase in momentum. You will need to drag the channel line lower to the new swing low pivot as the channel itself now has greater range.

Basic Rules for Channel Trading

  • In a bull channel you will buy at/or near the primary trend line.
  • When price reaches the top of a bull channel sell your long position and/or short the market.
  • In a bear channel you will sell at/or near the primary trend line.
  • When price reaches the bottom of a bear channel cover your short and/or go long the market.
  • When the price is in the middle of the channel, sit tight.
  • Do not enter a position in the middle of the channel unless you have some other form of technical analysis that gives you a clearly defined and well confirmed entry.
  • When price hits the bottom of a bull channel, you may add to your long position or prepare to exit the market.
  • When price hits the top of a bear channel, you may add to your short position or prepare to exit the market.
  • If price stalls for a prolonged period of time you may elect to narrow the channel or switch to a flat channel if one is readily visible until the initial trend resumes or changes.

Flat Channel

Ascending or Bull Channel

Descending or Bear Channel

Price Channels also assist in establishing both your stop-loss as well as your target.

  • If you bought the bottom of a bull channel you will look to take profit at the top of the channel. Your stop-loss will be just below the bottom of the channel, allowing room for regular volatility. Check the ATR for the time frame you are trading and take that into consideration as well.
  • If you sold the top of a bear channel you will look to take profit at the bottom of the channel. Your stop-loss will be just above the top of the channel while allowing for regular volatility. Check the ATR for the time frame you are trading and take that into consideration as well.

Learn to Trade the E-mini S&P 500

Learn to Trade the E-Mini S&P 500 as well as other futures markets in a live trading environment with professional traders. Test drive the online platform for a full week with the Christian Financial Radio Network (CFRN). These virtual classes are led by seasoned traders whose guidance and experience will allow you to grow in an educational setting. By the end of the course, you will be taught to look for helpful indicators that may improve your trading strategies. This is live training in live markets. Get started now!

Author: Introduced by Burton Schlichter

Written by DeWayne Reeves of CFRN.net. Burton Schlichter is a partner and featured broker at CFRN.net.

STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A LIMIT MOVE , IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

12 thoughts on “How to Trade E-mini Price Channels

  1. How do you risk manage? The following paragraph was included twice in the above article:

    TOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A LIMIT MOVE , IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

    Understanding the channels concept is good info, but again, how does one justify trading here without the ability to limit risk?

    TOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A LIMIT MOVE , IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

    1. Dear Sunday,

      There is an inherent risk in trading that is vital to understand clearly before pursuing such a venture. Some firms or brokers even may really not delve into "worse-case" scenarios. We do! Transparency in brokerage and clarity in trading is absolutely essential to trading. A trader needs to be aware of the absolute worst market conditions and to prepare their trading plan with that in mind. We do not see many flash crashes or limit moves these days, but a trader needs to be aware of report days and times. Also, the market conditions may be vulnerable to any global conflict or events. Traders need to be aware that a stop-loss, when elected turns into a market order. The market orders typically are time-stamped and executed or matched within the host computer of the exchange according to the time stamp! Your fill is contingent on the time of your order in sequence with the other orders (market). It is up to each trader to determine the risk within their trading plan!

      1. Ms. Leslie,

        How do you risk manage? Do you use stops? If so, how? Do you buy puts against your long positions?

  2. I agree .. great article! It's probably worth stating that the larger the time frame the more meaningful the channel is. A follow up from this article would have been how it was suggested at the time of the 'failed breakout?' in the first picture that the market would likely t=return to the middle of the channel.. which it has since done. if anyone has any questions about this article please ask them here!

  3. I took the Free Trial you suggested in the last article. It was nice to be in an environment with no vulgarity. I learned a lot during the week and am planning to become a member. I understood trend lines from the trial with you but I wasn't really familiar with Price Channels. After reading this article and looking at my charts they seem to be everywhere. Is there a certain time frame I should be looking at for different markets? I trade the S&P Emini, the Dow Emini, Euro Currency and the Nasdaq. Can you recommend the best time frames to spot price channels in these markets?

    1. Gabriel,
      This is Michael from the live trading room. The larger the time frame the more meaningful the trend line/channel will be. In the live trading room where I was drawing trend lines.. there was usually a matching line parallel to the trend lines I was drawing but it was not significant at the time because we were looking for price to be "on the other side" of the trend line I was looking at. We were actually using things mentioned in this article but it was in a live environment with several markets on faster time frames so I pointed only toward the trend lines(not the channel), as almost all of our trades are 'with the trend'. We would welcome you as a partner! Send us an email with some contact info at support @cfrn.net and we will let you know what our current 'partner offer' is and the myriad of payment methods! Price is no longer a barrier.. we have very affordable solutions.
      Thanks,
      Michael

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