Channel Breakouts are a popular method of trading stocks. The principal
behind a Channel Breakout is that when a stock trades above the highest
price or below the lowest price in the last N (number of periods) number of
periods, a new trend may be starting to take place.
This channel trading method can be used in any number of periods from
minute bars to weekly time frames.
The results of using such a method will often result in a stock moving
above a defined resistance or support area.
When a stock is in a defined trend, the channel will continue to step up or
down, depending on the trend.
Let’s look at CMGI (NASDAQ: CMGI).
As the New Year starts, there are many differing opinions on the direction
of stocks and the market in general.
This is an excellent time to use channels for trading.
The channel method will place you in a position to be on the right side of
any major trends.
CMGI has been in a steady rise over the past few months. Recently, CMGI has
been in a congestion range and by using a channel breakout method, a new
trade can be made in the direction of the trend.
The range has been 262 to 288. This is a 26 point range. I would Buy a
breakout at the top of the range or sell a breakdown below support. An
appropriate stop point on a stock like this would be the middle of the range.
The orders placed would be as follows:
Buy CMGI 289 Buy Stop, if filled place a stop at 275.
Sell Short CMGI 262 Sell Stop, if filled place a stop at 275.
Let the market tell you the direction. This method can be used with other
stocks at lower prices where stop points would not be as large. Use the
same methodology.
