Channel Breakouts
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.
The channel can be almost any defined range according to your time frame
and risk tolerance.
Let’s look at Amgen Inc. (NASDAQ: AMGN).
The Bio Tech stocks have been beaten up over the past couple of days. Is a
rebound in the future and how can one know that a rebound is taken place?
AMGN has been in a steady down trend, on a daily basis, for the last 8 days
with each day’s high not exceeding the previous day’s high.
Today, Wednesday, AMGN had a gap opening reversal, which is a very positive
bullish pattern.
The range for AMGN was narrow. If AMGN can breakout above the high of the
past two days of 60, I feel a reversal pattern may warrant a trade.
I would play this by placing a Buy stop at 60 �. If AMGN breaks 60, this
will get me into the trade.
If AMGN falls, the today was just a small rally in a major down trend.
If filled at 60 �, AMGN should continue to rise and a tight stop at 58 �
might be appropriate.
