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Channel Breakout Rules and Methods

1. Determine the length of the CBO channel in terms of price bars. In other words, if you are using a 14-period length, you will watch the last 14 price bars previous to the current price bar for a buy or sell signal.

2. If you are using a 14-day period then a buy signal will occur when the high of the current bar exceeds the highest high of the previВэous 14 price bars by x number of ticks. In most cases the x is defined as one or two ticks.

3. If you are using a 14-day period then a sell signal will occur when the low of the current bar is lower than the lowest low of the preВэvious 14 price bars by x number of ticks. In most cases the x is defined as one or two ticks.

4. Risk or stop loss can be defined in many ways, or the system can be used as a reversing system.

5. The CBO method tests extremely well on daily data and has conВэsiderable potential on intraday data as well.

The CBO method was tested on TradeStation with good results. Figure 11-3 shows performance of the CBO system with the indicated paramВэeters in S&P futures.

Summary and Conclusions

The CBO system is a sound and useful one for day traders. Its rules of application are specific, objective, and mechanical. It is readily tracked by computer and tends to get on board when major moves occur within the day time frame. I recommend tracking this method in the more active markets, particularly those markets which have a high dollar value per tick. As with most day-trade systems discussed in this book, entry signals are specific and objective. Exiting positions, however, are less objective, and you may wish to close out positions by allowing yourself to either be stopped out using a close trailing stop loss, or you may wish to exit at a given price or time target. It is not uncommon for large profits to be diminished substantially as a result of waiting for a reversing signal.