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.
I like to use the 20 periods as my N periods.
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 Network Appliance (NASDAQ: NTAP).
Channel Breakouts can occur in various time frames.
In this Market Call, we use 60-minute bars. I like 20 period breakouts.
NTAP has established a trading range of 58 to 69 over the past 3 days. This
is a large trading range, but usually the larger the range, the greater the
breakout run can be.
You can see from the chart below how this 3-day channel sets up.
If NTAP breaks 69, I would be a Buyer.
If NTAP breaks below 58, I would be a seller.
I would use a stop of 2 points from the enter after the resolve of this
channel which may be tomorrow or in the next couple of days.
