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.
Let’s look at Johnson & Johnson (NYSE: JNJ).
After a gap down on March 24, 2000, JNJ has been trading in a channel
between 69 and 73.
We are now at the top of this channel and a breakout above 73 would be a
channel breakout.
A base over the past week could be the base that can down propel this stock
higher.
I would Buy JNJ on a break above 73 �.
If JNJ does not break above this channel, do not take the trade.
Hopefully, readers of this column see how buying only when the trend takes
place and not taking trades that gap down, save a trader a lot of money.
If filled at 73 � on a Buy Stop, I would place a stop at 71 �.
