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Trading Breaking Channel Momentum

by on November 26, 2013 3:49 am GMT
 

Trending channels occur when price action is confined into a tight range, either ascending, descending and sideways (sometimes seen as consolidation channels).

The purpose of this system is to forecast and trade a break of price channels. Typically, momentum following the break is sustained long enough to achieve an attractive profit.

This system works best when channels are identified prior to the break and executed with limit orders because the price breakout is quick and entry will be poor.

For breakout long entry:

  1. Find a narrow channel within a pair on intraday or daily charts
  2. Enter a long at the break of the top channel line
  3. Place stop loss 15 pips from breakout (typically underneath broken trend line which can act as a SL barrier)
  4. Take profit at 2x risk or move stop-loss at breakeven with trailing stop-loss

For breakout long entry:

  1. Find a narrow channel within a pair on intraday or daily charts
  2. Enter a long at the break of the bottom channel line
  3. Place stop loss 15 pips from breakout (typically above broken trend line which can act as a SL barrier)
  4. Take profit at 2x risk or move stop-loss at breakeven with trailing stop-loss
4H Chart of EURUSD (Ascending Channel)

4H Chart of EURUSD (Ascending Channel)

1D Chart of GC (Descending Channel)

1D Chart of GC (Descending Channel)

Note: the break in the channel is typically be the opposite direction of where the channel in heading (i.e. downward break in upward channel). In a sideways or consolidation channel, a break can happen either to the up or downside.

Use a momentum filter, like the ADX with +/-DMI, to judge the velocity and strength of the breakout.

Disclosure: These systems are used for educational purposes and should be seen as such. Past performance is not indicative of future outcome.