A Forex trader is always aware of which of the 3 trading cycles (consolidation, breakout, or trend) a currency is before entering a trade. One of the most popular strategies to make a profitable trade is a channel breakout.
A channel in Forex trading is created by drawing lines between support and resistance in a chart when the market is in a consolidation mode. A consolidation is easy to identify in your chart with, the most common pattern being two almost horizontal parallel lines making your support and resistance levels. These two lines form a trading range in which the currency is trading over the period of time set in your chart if it is a day chart or a six month chart or whichever time frame you choose.
As the name suggests, a channel breakout occurs when the price of a currency breaks either of the support or resistance channel lines. When the price breaks the resistance level, the currency is believed to be at the start of an uptrend. On the other hand, if the price breaks the bottom line, the market is believed to be at the start of a down trend.
Keep in mind that not every not every crossover of the lines should be considered a breakout. By using a combination of technical indicators such as Pivot Points, MACD, RSI, and candlesticks to determine price breaks, you should be able to differentiate a false breakout from a real breakout and trend setter.
By mastering this simple strategy you can make significant profits. If you set your trade properly with a tight stop-loss, you will minimize your losses or even make small profits if you entered a false breakout. The profits you make from a real breakout will more than make up for your small losses from the false ones.
Most professional traders use channel breakouts as part of their trading arsenal. By using technical indicators they can tell with almost absolute certainty when a breakout is occurring and, in those few occasions when the signals were false, their tight stop-loss help minimize their losses. When done properly this strategy can lead to great profits.
If you want to make the channel breakout even more profitable, combine it with a trading strategy that will profit during the consolidation cycle. By doing this, you would be adding profits while waiting for the price breakout to occur thus maximizing your profits for the same investment in time.
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