The Breaking Channel Strategy
As anticipated in my previous article, here are the details about the breaking channel strategy. If you haven’t done so yet, please read my previous article about how to draw channels live here. I consider it to be a necessary prerequisite in order to be able to apply the following strategy profitably. Indeed, I’m taking your ability to discover channels for granted going forward.
This strategy is usually overlooked by many traders but I find it to have the required risk/reward balance for being worth the trade in many cases. Let me go into the technical side to show you what to do in order to get it done.
So, once a significant channel has been recognized, it’s important to take the following steps:
- Classify the direction of the trend: down-trending or up-trending knowing that the possible trade will take place only when the trend will eventually get reversed (so it will be a long for breaking a down-trending channel, short otherwise);
- Identify the possible entry point of the trade as soon as the channel gets broken;
- Have your stop always in mind before entering the trade (I’ll be more specific on how to set the stop in the article below);
- Set your target to meet at least the 2:1 p/l ratio, meaning your minimum goal stands twice as distant as your stop is;
- Monitor closely the trade especially looking for a relative volume increase. What you want to see is a raising interest happening among traders that will help the move to take place quickly (get ready to drop out if it doesn’t happen) to prove the accuracy of your call.
Now, there are multiple ways to set an effective stop. This really depends on your risk management parameters. Here is a list of what I consider to be reasonable stops:
- The highs or the lows of the previous 5mins candle (depending on long/short entry);
- A loss of holding on a significant technical indicator (e.g. the 9EMA or 20EMA). Ideally the VWAP is the best one, consider it if it’s in range from your entry;
- A predetermined number of cents/dollars from your entry (e.g. 20c or 50c).
Another possible way to approach this one is to scale-in, increasing your exposure as soon as you see your plan working. In this manner, you can maintain your first stop a little bit wider because your entry size will allow it without making any exception on your risk tolerance. Make sure to readjust your stop accordingly when increasing the exposure, last thing you want to do is transforming a good winning trade in a large loss.
Finally, I can show you some examples of past trades I took using this strategy. These ones will give you a taste about how much potential this strategy has more than anything else. Moreover, they all happened within the span of a few days last month.
Take a look for yourself:
-ALXN @118, stop @119.20 (high of the previous 5mins candle). Minimum target @115.50 (2:1 P/L ratio).
-BLUE @74, stop @74.75 (VWAP). Minimum target @72.50 (2:1 P/L ratio).
+HZNP @16.45, stop @16.20 (VWAP). Minimum target @16.95 (2:1 P/L ratio).
+JUNO @20.90, stop @20.60 (VWAP). Minimum target @21.50 (2:1 P/L ratio).
You don’t need to trade too much in order to make a living out of trading. Instead, it’s quite the opposite. Trade the best, leave the rest.
See you in chat-room.