Rabbit Trail Channel Trading Strategy – Backtest and Illustrative Example

There are different ways to skin a cat, they say. This is true in trading as well. While some find their edge in the market with the help of trading indicators, others trade the price action, and the rabbit trail channel trading strategy is one of their arsenals. But what is this rabbit trail channel trading strategy?

The rabbit trail channel trading strategy is a price action strategy that is mostly used to trade currency pairs. It is an intraday trading strategy that tries to capture some pips after a channel breakout on the 4-hour or 1-hour timeframe. With this strategy, you can make about 50 pips on a currency following a horizontal channel breakout on the H1 or H4 timeframe.

In this post, we take a look at the rabbit trail channel trading strategy. We tried to backtest the strategy but we failed to make all the code needed due to the vague trading rules of the strategy.

What is the rabbit trail channel trading strategy?

The rabbit trail channel trading strategy is a price action strategy that is mostly used to trade currency pairs. It is an intraday trading strategy that tries to capture some pips after a channel breakout on the 4-hour or 1-hour timeframe.

The strategy aims at making some 50 pips from the usual high momentum that normally follows a breakout of a price channel, especially a horizontal channel (or what we refer to as a ranging market). When the market is in a range, it is a sort of consolidation in preparation for a breakout. Such breakouts are usually associated with high momentum moves, which is what the rabbit trail channel trading strategy aims to profit from. The longer the consolidation, the higher the momentum after the breakout.

What are the rules of the rabbit trail channel trading strategy?

According to the creator of this strategy, these are the rules for trading this strategy:

1. Draw a channel on the 1-hour or 4-hour chart: The first thing you need to do to get this strategy started is you need to find a channel on an H4 or H1 chart. For a channel to be valid, two swing highs must confirm the resistance level and two swing lows confirm the support level. Look for this sort of horizontal channel on different currency pairs, and you will find them. Then wait for a breakout.
2. Identify when a breakout occurs in any of the directions: A trade setup requires a breakout, so try to identify it when it happens. A breakout is confirmed when the price closes beyond the boundary of the channel. The breakout is likely going to happen in the direction of the preceding trend, but it can occur in any direction. If the breakout is above the resistance (upper boundary), look for a buy setup; if it happens at the lower boundary, look for a sell setup.
3. Wait for a pullback on a 15-minute chart: Step down to the 15-minute chart and wait for a pullback. “Why wait? Because the market is a money-grabbing machine, and they want your hard-earned cash! You wait because sometimes the market does a “head fake” and turns against you.” The thing is that after the breakout, big players go for stop hunting to fill their own orders before pushing the price further. The pullback might drop back into the channel, it doesn’t matter. Look for the next rule.
4. Make an entry with the pullback reversal: Now, the pullback has completed and the price is reversing to continue in the breakout direction; it is time to find an entry. The criteria to make an entry after a pullback on a 15-minute chart is that there must be two 15-minute candles that support our trade. That is, if the breakout is to the upside and we are looking to go long, we confirm the 15-minute pullback reversal when the chart prints two consecutive bullish 15-minute candles. In the case of a downward breakout and a sell trade, we look for two consecutive bearish 15-minute candles after the pullback.
5. Place stop loss beyond the end of the pullback: For this strategy, the creator specifies that you always place a stop loss somewhere in the channel. The stop loss will be placed in the channel below the last support point for a Buy order. For a SELL order, the stop loss will be placed in the channel above the last resistance point.
6. Place a take-profit order: You would need to place a profit target. According to the creators, the strategy goes for a 50-pip target. So, when you make your entry, you calculate 50 pips take-profit mark and place your take-profit order there. “The rabbit trail may be 2 hours, or it could take as long as two days. You have your target so really you have nothing else to do but sit back and watch your trade make you some money!”

Where does the rabbit trail channel trading strategy come from? (History)

The rabbit trail channel trading strategy was apparently developed by Trading Strategy Guides, an online trading research team that mostly focuses on the forex market. The group created the strategy as a way for day traders in the forex market to profit from channel breakouts that happen on the intraday timeframes.

According to them, the strategy works in most currency pairs and should not be limited to the EUR/USD pair alone.

Example

The AUD/JPY charts below show an example of the rabbit trail channel trading strategy. The first chart is an H1 chart showing a breakout above a horizontal channel:

The next we do after the H1 candle closed above the horizontal channel is to step down to the 15 mins chart and wait for a pullback. See the 15-min chart below:

When the pullback has completed and the price has reversed to start rising again, we look to enter a long position, as you can see in the chart below. Note the position of the stop loss some pips below the low of the M15 pullback. Our profit target is 50 pips, which just happens to be just before the local high before another pullback. The reward/risk ratio of this trade is about 2:1.

Rabbit Trail Channel Trading Strategy backtest

Like most technical chart formations, this is a difficult strategy to backtest. It’s a breakout trading strategy, and we have covered that earlier in other articles, and we suggest you refer to them instead:

• London Breakout Strategy – Rules And Performance (Backtest)
• Opening Range Breakout Strategy- 5 minute ORB Trading System (Day trading, Backtest)
• Breakout Trading Strategies (Including Backtest and Examples with Channel System)

FAQ:

What are the rules of the rabbit trail channel trading strategy?

The key rules include drawing a valid channel on the 1-hour or 4-hour chart, identifying breakout directions, waiting for a pullback on the 15-minute chart, making an entry with a pullback reversal confirmed by two consecutive 15-minute candles, placing a stop loss within the channel, and setting a 50-pip take-profit target.

Why wait for a pullback in the strategy?

Waiting for a pullback is essential because it helps avoid potential “head fake” market movements where the price briefly moves against the breakout direction. This waiting period allows traders to enter more favorably after the breakout, especially considering market players engaging in stop hunting.

Is there an example of the rabbit trail channel trading strategy in action?

Yes, the article provides an example using AUD/JPY charts, illustrating the process from identifying a horizontal channel breakout on the H1 chart to making an entry with a pullback reversal on the 15-minute chart.