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.
I like using a 20 bar breakout.
Let's look at International Business Machines (NYSE: IBM).
For Market Call, we are using 60-minute bars as our time frame.
Since the announcement last week of IBM's earnings, the stock has been in a
trading channel.
There was the usual dead cat bounce after a 13-point drop, but where is IBM
going now?
By using a 20 bar channel break out method, we can jump on the trend.
This can be accomplished by placing two orders and letting the market put
you in the trade.
I would place a Buy stop order at 96 �.
I would place a Sell Stop Short order at 92.
I would use a 3-point stop once the trade is entered.
