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Strategy: Trend Channel Breakouts

If you have ever wondered where to enter an uptrending chart, then you may find this month’s trading strategy helpful. Many traders are concerned about buying too late in a trend, out of concern that they will be buying the top. There are a couple of technical patterns that you can be on the lookout for to help you know if you’ve got a reasonably strong trend that is worth buying into, including price channel breakouts and gap continuations.

Upside price channel breakouts.

After a stock has trended for at least two weeks, it is often easy to mark out a channel within which it is trading, as seen in Figure 1, of Overstock.com Inc. (OSTK). What you want to be on the lookout for is the emergence of a secondary trend following a small gap, as was seen on July 30. This constitutes an upside breakout above the preexisting price channel and is worth buying. You could either initiate a new trade once this signal is observed, or scale into an existing position.

Step-by-step action plan.

Here’s how you can start using this strategy:
Step 1: Visually scan for charts that have two or more weeks of price action in a defined uptrend, as seen in Figure 1. Keep those tickers in a watchlist and periodically review them until you see one of them making a small upside gap breakout
Step 2: Enter your position once price has moved at least $0.50 above the high of the day in which the price channel breakout was observed.
Step 3: Use an initial stop-loss at one dollar below the low of the day in which you entered, using a $2 trailing stop.

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