The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Channel Breakout
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 below a defined support area.
I feel that with any pattern, indicator, or strategy, the key is to
recognize when it works and when it doesn’t. A pattern or indicator tested
over a long period of time may only have a 50-50 chance of working out in a
trader’s favor. A key to successful trading is to limit losses with stops
and recognize when the pattern or indicator did not perform as expected.
Late last week, America Online (NYSE: AOL) reversed a long
downtrend.
Over the past 3 days, AOL has traded in a channel congestion range between
59 and 62.
A breakout one way or the other is anticipated. We are currently seeing a
battle between buyers and sellers.
The way I like to play this channel is by being ready to Buy the break up
or Short the breakdown.
This can be done buy placing the following orders �
Buy AOL 62 � Stop
Sell Short 58 � Stop
Whichever way the break occurs, I would place a stop at the mid point of
the range at 60 �.
