Forex Channel Breakouts - Riding a Tsunami of Profits

by : Jason Fielder

Forex channel breakouts occur anytime that a price, either going high or low, breaks one of the set lines of a channel that is developed through technical analysis.

A channel occurs when two lines are made to show the range of a current market. This can be done whether the market is in trend or in counter-trend. One line represents the high of a current channel, while the bottom line represents the low. The channel is found through technical analysis.

Any time the price of a currency pair rises above the top line, that is an upwards channel break. When the price of a currency pair drops below the bottom line of a channel, that is a downward channel break, also sometimes referred to as a "breakdown" as opposed to a "breakout." The channel breakout in a Forex market can happen either up or down, just as long as it escapes the channel created by your technical analysis.

Not every break in the line becomes a full blown breakout. There are often times when a price may temporarily just break one of the lines, then retreat back into the channel. These are called "false breaks" or "false breakouts."

These can be frustrating because a lot of money can be made in the Forex market off of being in early on a major breakout, so false breakouts tend to get the hopes up before dashing them again, but this is all part of trading Forex. Being on the right side of a true channel breakout is worth all the false alarms you might find along the way.

Besides, if you use your stops correctly, a fake channel breakout shouldn't cost you much, and it may even lead to a very slight profit. It's certainly worth the risk because when you hit the right side of a Forex channel breakout, the profits in some extreme cases can even be hundreds of pips.

A true Forex channel breakout that takes off however, can provide fantastic profits, and is a major reason why technical analysis is used in the market: to try and determine when these channel breakouts are going to occur and to get in the market early can bring good profits.

Channel breakouts can often lead to the forming of another channel, so constant analysis should take place even as the market is in the middle of a breakout in either direction. If you are riding the price up, a trailing stop can be a good idea since reversals can happen rapidly, and sometimes seemingly without warning.