This channel breakout trading strategy has made many millionaire. Most super successful traders love to trade channel breakouts in one form or another. Trading Channel breakouts should be the core part of your trading strategy.
Now, the first person who used channel breakouts was Richard Donchian. Richard Donchian is considered to be amongst the pioneers of technical analysis. He developed the 4 Week Rule for the stocks and futures market. But surprisingly this concepts very well for the forex market too. Over and over again you will come to know in your trading career is that what works in one market also works in other markets. Why? Simple. All markets are same. How? Simple. Markets are just people buying and selling. Price action is just a reflection of their mass psychology. So, no matter what you trade, you will again and again learn that what you learn in one market will most often work in the other market too. Of course, there will be some slight variations but the basic concept will be the same. So, this 4 Week Rule was developed by Richard Donchian for the stocks and futures market but it works for the forex market too!
The 4 Week Rule In Trading Channel Breakouts
This is a simple rule. You buy when the currency pair makes a new 4 week high. In the same manner, you sell the currency pair when it makes the new 4 week low. Now, if you go long, you reverse and go short if the currency pair makes a new 4 week low. Similarly, if you go short, you reverse and go short if the currency pair makes a new 4 week high. This is the 4 week rule in trading channel breakouts.
This 4 week rule was the basis of the Turtle Trading System developed by Richard Dennis. Richard Dennis was a small time commodity trader who mastered channel breakout trading. He started with only $450 and ended up making a fortune of around $150 million over the course of next few years. He gave his Turtle Trading System to his Turtles and they too became millionaire trading channel breakouts. This channel breakout trading strategy is simple and works and many traders now use it in their trading.
20/20 Channel Breakout Trading System
The basic principle behind a channel breakout is to find the low or high for a certain number of days in the immediate past. 4 weeks seem to work very well for channel breakouts. Now, 4 weeks are equal to 20 trading days. So, we will be looking for the 20 days low or high. This is your 20 day channel breakout. Look back over the past 20 days for highest and the lowest price. Go long just above the 20 day high and go short just below the 20 day low with two pending orders.
Suppose, the orders are not filled on that day. On the next day, again find the 20 days high and the low and again put in two new entry orders. Repeat this exercise daily till your orders get filled. Now, suppose, your order gets filled on one side. The entry order on the other side will become your stop loss. Let me clear this with numbers. Suppose, you are trading EURUSD. The 20 day high is 1.3452 and the 20 day low is 1.2253. So, what you will do is place a buy stop entry order at 1.3452 and sell stop entry order at 1.2253.
Suppose, the price action hits the buy stop entry order that you had placed and you are long now with the price of 1.3452. The sell stop entry order at 1.2253 will now act as a stop loss order. You don’t have to do anything. Just place another sell order at 1.2253. This ensures that once you get stopped out of your long position, you immediately go short.This is also the classic channel breakout strategy that was used by Richard Dennis and his turtle traders to make millions trading commodities. You can practice this strategy on your demo account. In the next few days, we will discuss some enhancements to this classic channel breakout strategy that can further improve this simple channel breakout trading system.