E-mini Trading: Consolidation Patterns And Channels
Trading in a channel means many things in e-mini trading because trading channels come in all sorts of shapes, directionality, and length. There are also some semantic issues when discussing channels or consolidation patterns. For example, what I consider a retracement is often called a flag, in technical jargon. Nonetheless, it is a consolidation. There are also short sideways periods when the market takes a breather before resuming a trend. And finally, there are longer periods of range bound consolidation or channels which present some difficult trading issues.
As a day trader, it is important to identify which type of pattern you may be entering. Has there been a definite uptrend or downtrend in the market and the price action has started to move sideways? Or has the trend taken a short breather and retraced upwards or downwards (depending on whether the movement is to the upside or the downside) and there are indications that it may resume its initial trend? Or, has the trading range been narrow and easily defined for several hours?
The purpose of this article is to discuss the last type of consolidation channel. Short sideways movement and retracement patterns are all very tradable and will be the subject and other articles, as there are lengthy discussions needed to truly understand these patterns. On the other hand; long, range bound channels will be the topic of our discussion today. My thesis on these long range bound channels will be fairly straightforward; generally speaking, they are a black hole that will happily suck money from your trading account.
Long periods of market action in a defined channel should be an indicator to most traders that the market is in near equilibrium. It is also not unusual to notice that the volume in these extended channels is often light. Yet I watch traders on a daily basis pound away at these narrow channels hoping the market will break out to the upside or to the downside. It rarely does. As a matter of fact, though trading channels often have a plethora of small breakouts, which sends the retail traders into a near buying or selling frenzy, they usually and casually retrace back into the original channel, leaving the retail trader with a loss or, at least, in a very unfavorable position relative to their breakeven point.
That being said, the trading action inside these channels sometimes appears logical and rhythmic, following what seems to be a predictable serpentine pattern bouncing off the resistance and support that are the channel parameters. Again, these patterns entice many inexperienced traders and to entering trades inside the channel. Most of the action inside a trading channel, or range bound consolidation pattern is random in nature. Traders who enter a trade inside the channel often learn a harsh lesson in the randomness of channel trading. In short, I avoid trading inside a channel and wait for better opportunities, trades with higher probability for success.
There are a large number of articles I read before writing this article. Most were published by trading educators extolling the virtues of channel trading, so I must assume that my position on channel trading is a minority opinion. On the other hand, I have been fortunate enough to trade with some of the best traders in the world and they avoid trading in channels at all costs. Quite simply, the risk reward ratio is not particularly favorable and at some point the price action will break out of the channel. If you are on the right side of the breakout or breakdown, you will have a wonderful day. On the other hand, if you’re on the wrong side of the breakout or breakdown, your day will be less than wonderful.
In summary, we have pointed out there are various types of channels and some are good candidates for trades, while the extended sideways consolidation-type pattern offers little for most traders. Further, I have stated that trading in extended channels is a low probability proposition and I avoid trading these patterns.
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