BREAKOUT CHANNEL HIGH/LOW STRATEGY: A STEP-BY-STEP GUIDE

BREAKOUT CHANNEL HIGH/LOW STRATEGY: A STEP-BY-STEP GUIDE



In trading, one effective strategy is to identify breakout channels—price movements that break through established high and low levels on a chart. This strategy involves drawing a channel on the graph to visualize these levels. Once a channel is broken, traders look for a pullback, where the price retraces back to the channel and tests either the support or resistance. When the price touches the support or resistance and bounces off it, traders can consider entering a trade, with specific entry rules for both long and short positions.



Here's how to execute this strategy:



Identify the Breakout Channel: Draw a channel on the chart to mark the highs and lows of the price movements. The channel should encompass the range within which the price has been fluctuating.

Wait for the Breakout: Monitor the price action closely. When the price breaks out of the channel, indicating a potential trend reversal or continuation, be prepared to act.

Look for Pullbacks: After the breakout, wait for a pullback—a movement where the price retraces back toward the channel. This provides an opportunity to enter the trade at a favorable price.

Confirm Support/Resistance: As the price approaches either the support or resistance level within the channel, observe how it reacts. If the price touches the support or resistance and then reverses direction, it signals a potential trade opportunity.

Entry Rules: For long trades, consider entering when the price bounces off the support level. For short trades, consider entering when the price bounces off the resistance level. Ensure to use appropriate risk management techniques, such as setting stop-loss orders.

Calculate Take Profit: Determine the size of the channel by subtracting the resistance value from the support value. This becomes your target price.

Set Take Profit: Add the size of the channel to the price where the pullback occurred. This sets your take-profit level. For safety, consider moving the take-profit level slightly closer to your entry point to account for potential fluctuations in price movement.

When to Avoid Trading:

Unfavorable Risk-Reward Ratio: Avoid trading if the ratio between your stop-loss and take-profit levels is less than 2.

Strong Support/Resistance Levels: Avoid trading if there are significant support or resistance levels blocking your path to the target.

Second Pullback: Only trade the first pullback after a breakout. Avoid trading subsequent pullbacks as they may indicate weakening momentum or a false breakout.

By following these steps and adhering to the outlined rules, traders can effectively implement the breakout channel high/low strategy to identify favorable trade opportunities in the market. Remember to always exercise caution and conduct thorough analysis before making any trading decisions.









On the tradingView platform we can, in addition to manually drawing the channels, we can use the Fibonacci channels tool which helps us a lot. The logic is the same as explained before and the rules are the same. See examples in the images.