E-Mini Trading: Learning to Trade in the Channel

When to actively trade e-minis

It is commonly viewed as unwise to dabble with trading e-mini contracts when they are in a consolidation channel. By and large, that this is some good guidance because trading in channels can be treacherous and result in substantial losses. As longtime traders though we relish the opportunity to channel trade e-mini contracts.

First and foremost, it is necessary to evaluate the type of channel that has formed and you are considering trading. Some channels are extremely tight and have extended wicks in their candlestick formation. This type of channel is called "barbed wire" and ought to be avoided at all costs. Further, channels that are less than 8 ticks in any contract are usually impossible to trade effectively. However, a 12 tick channel will make my heart beat fast as I see in reference to trade set ups in these types of channels. There is one caveat, though; the price movement in the 12 tick channel have got to not be roaming along the center line. I commonly put up some Bollinger Bands and watch the price action ricochet from the top line of the Bollinger Bands to the mid-line or bottom line. Now, you have your in reference to set-up in place.

Methodology to trade e-minis

The methodology is relatively simple; when the price action pierces, or better yet, breaks out of a Bollinger band, look to take a trade in the opposite direction. This trade is a leap of faith based on a number of premises: Breakouts from channel consolidations notoriously fail. The beauty of this trade is that a myriad of small investors set-up for a channel breakout 4 or 5 ticks above the top or bottom channel line. In general speaking, the small investors are picked up in the trade and then it starts to slide back into the channel. Most smaller traders set their stops at 10 or 12 ticks so when the price action gets 5 or 6 ticks back in the channel, the bottom drops out. This trade is extremely effective. After the trade entry, I set my stop loss at 5 ticks. I want to protect against a real breakout or breakdown ought to it occur. As I said, breakouts or breakdowns from channel consolidations commonly fail, but I still want to protect myself if an unlikely breakout or breakdown ought to materialize. This trade is in particular effective on the YM contract from 11:30 AM CST to 1:30 PM CST when the smaller traders are dominating the market and the larger traders are in the stand down period. This is a trade where you are competing for capital against the small traders not the large traders, which is much more hard. Working on the premise that breakouts from the consolidated channel commonly fail, it is the small traders who are preparing for a breakout that in general end up on the losing side of the trade.

Whilst this training methodology is not for the faint of heart, I have used it successfully for a myriad of years and sustain to do so. I will admit that taking a trade in the opposite direction of the price movement can seem a dangerous tactic, but encounter has shown me that breakouts from consolidation channels are infrequent. I ought to as well point out that it is not unique to get a little upside down, say two or three ticks, before the price action starts to move back into the channel.In summary, I have stated that trading in consolidation channels can be treacherous and risky company. That being said, I delight in trading in these channels, despite some of the obvious risk. In short, it is possible to trade channels with proper methodology and tight diligence.