How To Trade Channel Breakouts
Channel Breakout trading can be highly profitable
. But first what is a channel? A channel is formed when the price action gets bound between two trendlines. Now, these two trendlines can be horizontal, ascending or descending. Think of these two trendlines as the support and resistance but this time these support and resistance lines can be ascending as well as descending or horizontal as usual.
A channel is formed when the price action is bounded between two trendlines that can be horizontal or sloping. Trading channel breakouts can be a highly profitable strategy and is highly popular among professional traders. Reason is simple.
Price action will not stay bound within the channel forever. At some point, there will be some fundamental shift in the market that will trigger the price action to burst out of the trading range.
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.
The narrower the vertical pip range, the higher the chances are for the successful breakout. Now, you can trade a rectangular channel on both sides. Normally in range trading you enter the market at the support and get out at the resistance. But not in channel breakout trading. You only enter the market when there is a 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.
Place a market or stop entry price order just a few pips away from the breakout. This is done so that you don't get entered into the market at a wrong price. When a breakout takes place, expect a lot of volatility in the market and there can be a lot of slippage. You need to ensure that you don't get entered in the market at a wrong price. Whenever trading a breakout, if you can predict it's direction correctly, you can make a fortune.
Channels get formed before the release of some fundamental news most of the time. This happens as most of the traders stop trading in anticipation of the fundamental news annoucement that can be FOMC Meeting news announcement with an expected interest rate change or it can be the NFP Report Release. Whatever, breakout trading if done correctly can be highly profitable.
by: Ahmad Hassam.
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