Channel investing is based on the principle that stocks move in predictable patterns. If you can identify a channel – a range in which a stock fluctuates regularly – then you can follow that maxim, "buy low sell high," to earn consistent income.
A channeling stock trades in a wave pattern. It rises until it reaches a resistance level, then it retreats until it hits a support level. The pattern is determined by investors. As the price rises, investors sell, taking profits and anticipating they can buy back the stock at a lower level. In this manner, investor behavior creates a channel. Channels may be rising, with each new high and low being higher than the preceding ones, or they may be declining, with each new high and low being lower than the preceding ones. Channels can also be horizontal, with the resistance and support levels remaining the same. To identify any of these channels, you need to study stock charts. If you can draw straight lines connecting at least two highs and two lows of a stock's trading range and they are parallel, then you have found a channel. The investing strategy is simple – buy when the stock hits the support level and sell when it reaches the resistance level. Make some paper trades before investing real money so that you can thoroughly understand and recognize the channels.
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