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.
When the breakout also takes a stock to new 52 week highs, that is
significant.
Let's look at Digital Island Inc. (NASDAQ: ISLD).
This is a good example of a stock that has been breaking out of 20 period
channel highs and continues to break these as the stock moves higher and
higher.
Remember that we are using 60-minute bar charts here, but this can work in
almost any time frame.
On October 25, 1999, ISLD broke out of a long congestion base.
Over the next couple of days, ISLD exploded, moving higher moving from 28
1/8 at the break to 54 � on Tuesday of this week.
After a day of retracement, ISLD broke up again today at breaking that old
high of 54 � and continued to move higher.
If you are looking for stocks that are moving up, check the new high list.
I would Buy ISLD on any higher prices than today's close.
I would place a stop at 54.
Do not take the trade if ISLD or any continuation trade if the stock opens
lower in the morning.
