The type of market we are in will have an effect on the strategies that
many traders will use.
If we are in a sideways pattern, some traders will abandon moving averages
or another trend following method.
I am basically a Trend Trader. I am looking for a trend and will accept the
problem of whipsaw associated with sideways markets.
I also realize that we have a market of stocks, not necessarily a stock
market.
Look at Friday as an example. IBM breaks support and closes down 4 5/8 or
3.5%. Dell Computer Corporation, DELL was up 4.5% or 2 1/8 on the same day.
My point here is to find indicators and pattern that you can establish
sound systematic strategies knowing that they working better during some
markets and not as well in others. Over the long run, if your strategies
have sound foundation and cuts losses, you should prevail in the long run.
Channel Breakouts are one of the most respected methods of trading. Traders
will have different trigger strategies.
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.
I like using a 20 period breakout.
Let's look at Lucent Technologies, (NYSE: LU).
For the last month, LU has been range bound. The entire market has been
range bound.
But with the current action, I am expecting another breakout here.
To be sure that LU it is going through resistance now, I would place Buy
Stop order to Buy the breakout or enter myself on Day Trading software hits
the breakout price.
I would Buy LU above today's high at 70 1/2 on a Buy Stop.
As we saw in yesterday's Market Call, do not anticipate. Wait for the
breakout.
If the stock trades at 70 � and I enter, I would place my stop
immediately at 68 1/8.
