How To Trade Channel Breakouts
When price action gets bound in a trading range, it might continue to move back and forth between the support and resistance levels for sometime before it makes a breakout either on the upside or downside. This breakout can be triggered by a sudden shift in the underlying fundamentals in the market. Trading breakouts is always highly profitable if done correctly.
When the price action bursts out of the upper channel, it will tend to move in the upward direction and in the same manner when the price action bursts out of the lower channel, it will tend to move in the downward direction.
It is always good to place the entry and exit stops close to these channel lines to be on the safe side when trading channel breakouts.
Now, when the channel is formed by horizontal trendlines and if the range is narrow this means that the price action is about to breakout either on the upside or the downside. The narrow the channel range, the higher the chances of a successful breakout.
In the same manner, in case of a channel formed with a descending slope, always trade only the upside breaut as the chances of it's success are higher as compared to a downside breakout that can be false most of the time. In the same way, never trade an upside breakout on an ascending channel. The chances of it's being false are higher as compared to a downside breakout.
As said before, only trade an upside breakout on a descending channel and a downside breakout on an ascending channel. Always place a market or stop entry order, a few pips past the breakout level.
Now, the most important question is how to identify channels? You can identify channels on an houly or a daily chart bydrawing simple trendlines. Now you need to confirm the momentum in the price action with the help of Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD).
If you trade a false breakout, you will get whipped by the market soon. So, the art of channel breakout trading lies in knowing when the breakout is true and when it is false.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Download the Oracle Trader Software that made Dustin Pass a millionaire trading news releases FREE. Get these Forex Scalping Cheatsheets FREE!
by: Ahmad Hassam
Total views: 46
Word Count: 377
Date: Fri, 1 Oct 2010
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