Intraday Channel Breakout

One of the successful techniques used by day traders is based on breaking out on a price break out above resistance or below support. The expectation here is that once a market penetrates above a previous resistance level, the probability is high that the new trend will continue, at least long enough for traders to generate profit. It is also believed, conversely, that if prices fall below a previously established support level, then the market will continue in the down direction sufficiently long to permit short-term traders to take profits. The channel break system for day trading is designed to achieve these goals. If you reflect upon the many occasions in which markets have penetrated their intraday high indicator quickly. Similarly, if you consider the many times youve seen prices fall below the days low only to continue persistently lower for the balance of the day, you will realize the value of this indicator for the purpose of selling short.

Figures 11-1 and 11-2 illustrate the intraday charts showing breakouts above support and below resistance. The channel break system for day trading is designed to capitalize on such breakouts. In other words, the day trader using this approach will be buying on strength and selling on weakness, which is not such a bad idea if you consider the importance of going with the existing trend. Naturally, the other side of the coin here is that those who buy breakouts on the up side or sell breakouts on the down side may be entering positions near at the top of the market or at the bottom of the market as the trend changes, and that risk may therefore lead to losses more frequently than would buying at support or selling at resistance. I will allow the facts in this case, however, to speak for themselves by showing you some system test results generated with Omega research program TradeStation.

How the Channel Breakout System Works

The channel breakout system (CBO) is a very simple system indeed. In fact, its as old as the hills, dating back to the days of "old man" Keltner who published the Kelner Statistical Service on commodities back in the 1950s and 1960s. The idea is quite logical and elementary. In fact its beautiful in its simplicity. It is based on the fact that markets spend most of their time moving sideways as opposed to trending. When such a sideways pattern, or channel, develops, the astute trader will want to buy breakouts above the top od the channel while selling breakouts below the bottom of the channel. The logic is solid; however, one must remember that there are many false breakouts. This is why the CBO is not an especially accurate technique and why it is, however, a method which can pinpoint the start of major intraday moves.

Here are the simple CBO rules of application:

The CBO method was tested on TradeStation with good results. Figure 11-3 shows performance of the CBO system with the indicated parameters in S&P futures.

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