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 Level 3 Communications (NASDAQ: LVLT).
This set combines a couple of patterns and indicators that may create a low
risk breakout opportunity.
A short term channel that formed over the past few days and a
retracement from the April 12 low to the first rally at 94 on May 2.
LVLT has been in a trading range the last few days.
This range is taking place at a 62% retracement level from the rally of
April 12 through May 2.
If LVLT can break 77 �, I would enter with momentum.
I would risk 2 points.
The order can be entered by placing a Buy Stop at 77 �.
If filled, place a stop at 75 �. LVLT may rally from this level.
