33# Channel Breakouts Trading System
Submit by Janus Trader 04/91/2012
Channel breakouts are basically the same thing as triangle breakouts:
However, because channel formations typically take a longer time to build up (compared to triangle formations), they usually yield larger profits. Trading on a channel formation breakout is a great way to make hundreds of pips in less than a week!
How To Trade On
Now I’m going to reveal to you one of the biggest secrets of how to properly trade on breakouts.
But before you can fully appreciate the beauty of this trading technique, you’ll first need to understand how most people typically (and wrongfully) trade on breakouts.
Typically, most traders will place a pending BUY or SELL order 1-5 pips outside of the triangle or channel to ‘catch’ the explosion. While this may seem like a logical thing to do, it’s actually a risky way to trade.
This is because explosions are periods of time where there is a lot of emotional trading in the market.
What I mean by ‘emotional trading’ is that there will be many traders who are letting the emotions of fear and greed guide their trading actions… and it is during these times that the institutional traders (aka. the market sharks) like to prey on such behaviour. I won’t go into too much detail regarding this because frankly, the only thing you’d need to know is not to trade on the initial explosion.
So how do we properly trade on breakouts?
The trick here is to first let the ‘emotional trading’ subside, and wait for the market to settle down and THEN tell you whether the bulls or bears are taking over.
Here’s how to trade on an explosion: below we see a channel explosion on the downside (on a 1-hour chart):
At this point, we’ll wait for the candle to fully form (i.e. wait till the hour is up) before placing our trade.
Once the explosion candle has completely formed and is shown to be a valid explosion (i.e. the candle does not close back into the channel), we will place our pending trade orders as such:
• Pending SELL order: 5 – 10 pips below the ‘low’ of the explosion
• Stop Loss order: At half the real body of the explosion candle
And of course… we make money!
This is how you should trade on explosions out of the triangle and channel formations.
The fundamental idea behind this technique is to first LET the market tell us that the explosion is a valid one. Many other traders will be greedy and want to trade on the explosion immediately as it happens… and those are the traders that that get eaten up by the sharks.
What About Profit
Profit targets are a little tougher to estimate for maximum profits… But here are four guidelines you may wish to follow when placing your profit targets:
• At least 2 – 3 times your stop loss allowance
• At a prominent support/resistance level
• At a round number (ex. 1.5600, 109.00 etc)
• When you see a slowing down of momentum.
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Write a comment
Bob Christian (Sunday, 04 January 2015 22:31)
2015 - Still works!
nsrajan (Friday, 17 April 2015 19:33)
Very logical guideline to catch the B/O. The only problem is to catch the explosion candle. Requires lots of patience and attention to catch the train.
Taufiq (Tuesday, 03 November 2015 17:12)
Beware of the candle retesting back the lower channel line. Most of the time it does.
So be more safe on placing the stop loss and be patient to wait for the confirmation (e.g. by checking on lower time frame).