Tuesday, November 3, 2009

CFD Trading Strategy - Rising Channel Upside Breakout

By Jeff Cartridge

The rising channel is a well known chart pattern that you would expect to trade on the short side, but can also be traded if it breaks out to the upside. A rising channel is formed when the price action is contained within two lines. Both the bottom line and the top line slope up, with both lines near to parallel.

Rising Channel, Surprise On The Upside

Rising channels are normally patterns that would be considered to trade on the short side, but also can perform on the upside. 51% of the patterns break upwards and can deliver good returns when they do. The average gain is 0.53% in 8 days with under half of the breakouts (40%) being profitable. There are better patterns to trade on the long side, but selecting the right conditions can make trading a rising channel attractive.

Specific Setups to Improve Profitability

When you look at the performance of a rising channel in bearish market conditions you will see the results were not as strong as they were in more bullish years. Trading a rising channel when the market is in an up trend or consolidating improves your trading results. The sector is best if it is in an up trend or a down trend, while the stock is ideally in a down trend or a consolidation. So in effect you are entering a retracement in the stock during a bullish market phase.

Rising channel patterns with a very tall height relative to the share price (10% or more) produce smaller returns along with very long patterns (40 days or more). When a rising channel forms around one large candle that reaches both boundaries it produces inferior results.

Avoid rising channels where there are two consecutive closes, highs or lows at the same level prior to the breakout. These are often signs of an illiquid stock. Ensure that the volume is supportive of the breakout, i.e. volume as the stock rises is greater than volume as the stock falls.

Rising Channels Can Deliver Good Profits

Following a series of rules to determine which rising channel to trade can improve results dramatically, but heavy filtering is required, more than 2000 trades are reduced to less than 100 to get decent results. By applying these filters rising channels are profitable on 63% of the trades and return an average of 2.11% per trade in 10 days. This is a profitable pattern to trade.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.

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