Channel breakout

A channel breakout is the opposite bet to range trading. When a pair closes at its highest level in a month, breakout traders assume something has changed and buy, expecting the move to continue. Variations of this rule were used by the famous Turtle traders in the 1980s.

The rules

• Buy when the pair closes above its highest close of the last 20 days.
• Sell short when it closes below its lowest close of the last 20 days.
• Exit a long position at a 10-day low, and a short position at a 10-day high.

Test it on real history

What the numbers usually show

Like other trend strategies, breakouts lose often and win big. Many breakouts fail and reverse within days. The strategy depends on occasional sustained moves, such as the yen’s large swings when Japanese policy diverges from the rest of the world, to make up for the false starts.

A shorter exit channel locks in gains sooner but cuts winners short. A longer one rides trends further and gives back more at the end.