Lesson 2

Breakout from Consolidation

Momentum Trend Trading System

By Adam Khoo

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2020
 Breakout from Consolidation
The Breakout is a swing trading strategy that seeks to buy stocks that have
broken above the resistance level of a consolidation.

When a stock is able to break above the resistance level of a consolidation, there
is a high probability that bullish momentum will trigger the start of a new
uptrend. The longer the consolidation, the stronger the breakout is!

Breakout
Resistance
Breakdown from Consolidation
On the short side, we aim to sell short stocks that have broken below
the support level of a consolidation. When a stock is able to break
below the support level of a consolidation, there is a high probability
that bearish momentum will trigger the start of a new downtrend.

Support
Breakdown
 Defining A Consolidation
Pattern for long Breakouts
When trading breakouts from a consolidation pattern, I am looking for consolidation
with a flat top resistance (same highs) that is tested at least 3 times

The consolidation pattern is either making same lows or higher lows.

1 2 Same Highs 3

Same lows

1 2 3 Same Highs

Higher Lows
 Defining A Consolidation
Pattern for Short Breakdowns
When trading breakdowns from a consolidation pattern, I am looking for
consolidation with a flat top support (same lows) that is tested at least 3 times

The consolidation pattern is either making same highs or lower highs.

Same Highs

1 2 Same lows 3

Lower Highs

1 2 3
Same lows
 Chart Setup

20 EMA, 40EMA, 50SMA, 150SMA, 200SMA

Force Index (13)
MACD (12,26, 9)
Parabolic Stop and Reverse
Calculating ATR -Average True Range

Average ATR of the last 3 months

Calculating ATR -Average True Range
 Breakout from Consolidation (Long)
Entry Rules
• S&P 500 is Bullish (20EMA is above 50MA. Price above 20EMA). Stock in a Bullish Sector
• Price is in a consolidation pattern, price making same highs (resistance is tested 3
times or more)
• Uptrend confirmed by moving averages 20EMA > 40 EMA, 50SMA > 150SMA or Price
>200SMA (and 200SMA sloping up)
• 1 out of 3 Momentum Indicators are Bullish (Force Index (13), Parabolic SAR or MACD
(12,26,9)
• Candle body opens and closes above the resistance level- Breakout Candle
• Breakout candle must be near or touching 20EMA
• Place a Buy Stop Limit Order a few cents above the high of the breakout candle
• Stop Loss is placed 1 ATR below the resistance/ support level
• A Fixed Target Price of 2R can be used or Exit the Trade when 20EMA crosses below
40EMA
Buy point 1
Above breakout candle 20EMA
Support
Resistance 1 ATR
Stop Loss
1-ATR below support line
 Breakout from Consolidation (Long)

Target Profit $343.08 Entry: Buy Stop Limit $327

Resistance $322.31 1R
StopLoss $319.01
Entry
Resistance

Entry $327

StopLoss
Stop loss $319.01
= $322.31 - $3.30 = $319.01
1R = $7.99
Target Price = $327 + 2R = $342.98

Average ATR 3 months = $3.30

 Breakout from Consolidation (Long)

Resistance Entry
Entry: Buy Stop Limit $26.59
Resistance $26.56

Stop Loss $26.11

Stop loss = $26.56 - 1ATR ($0.45)

 Breakout from Consolidation (Long)

Entry: Buy Stop Resistance Entry

Limit $20.05

StopLoss $18.50
Over Extended Breakout Candle

Resistance Entry
 Breakout from Consolidation (Long)
Entry Rules
• If the breakout candle is overextended (i.e. far from the 20EMA), wait for a
retracement and a re-test of the Resistance/Support level
• Enter a ‘Buy Stop Limit’ Order above the high of the first bullish candle pattern that
appears after the re-test of support. Again, entry should be near the 20EMA
• Place a Stop Loss 1ATR below the Resistance/Support Level
• A Fixed Target Price of 2R can be used or Exit the Trade when 20EMA crosses below
40EMA

Buy point 1
Above breakout candle Buy point 2
Support Above candle that test
support
Resistance 20EMA 1 ATR
Stop Loss
1-ATR below support line

Buy Point 1: Buy Point 2:

•Just above first breakout candle •Used when first breakout was too extended
•Ideal when price is near/touching 20EMA • Avoid some false breakouts
• May miss breakouts that don’t pull back
 Breakout from Consolidation (Long)

Resistance
Support
Entry: Buy Stop Limit $43
Resistance = $42.35
Support
Stop Loss $41.50

Stop loss = $42.35 - 1 ATR ($0.85)

 Breakout from Consolidation (Long)

BuyResistance
stop limit $277.33 Entry

Stop Loss $272.2 Stop Loss

Breakout from Consolidation (Long)

Entry

Resistance Entry
 BreakDown from Consolidation (Short)
Entry Rules
• S&P 500 is Bearish (20EMA is below 50MA. Price below 20EMA). Stock in a Bearish Sector
• Price is in a consolidation pattern, price making same lows (support is tested 3 times or more)
• Downtrend confirmed by moving averages 20EMA < 40 EMA, 50SMA < 150SMA or Price
<200SMA (and 200SMA sloping down)
• 1 out of 3 Momentum Indicators are Bearish (Force Index (13), Parabolic SAR or MACD
(12,26,9)
• Candle body opens and closes below the support level- Breakdown Candle
• Breakdown candle must be near or touching 20EMA
• Place a Sell Stop Limit Order a few cents below the Low of the breakdown candle
• Stop Loss is placed 1 ATR above the resistance/ support level
• A Fixed Target Price of 2R can be used or Exit the Trade when 20EMA crosses above 40EMA

Stop Loss
1-ATR above resistance line

Resistance 1 ATR
Support Sell point 1 20EMA
below breakdown candle
 BreakDown from Consolidation (Short)
Entry Rules
• If the breakdown candle is overextended (i.e. far from the 20EMA), wait for a
retracement and a re-test of the Resistance/Support level
• Enter a ‘Sell Stop Limit’ Order below the low of the first bearish candle pattern that
appears after the re-test of support. Again, entry should be near the 20EMA
• Place a Stop Loss 1ATR above the Resistance/Support Level
• A Fixed Target Price of 2R can be used or Exit the Trade when 20EMA crosses above
40EMA

Stop Loss
1-ATR above resistance line
Support 20EMA 1 ATR
Resistance Sell point 1
sell point 2
below breakdown candle
Candle bounces off
resistance
Sell Point 1: Sell Point 2:
•Just below first breakdown candle •Used when first breakdown was too extended
•Ideal when price is near/touching • Avoid some false breakouts
20ema • May miss breakdowns that don’t pull back
BreakDown from Consolidation (Short)

Stop Loss $1.85

Support Entry 1
Entry 1: Sell Entry 2: Sell Entry 2
Stop Limit $1.57 Stop Limit $1.51
BreakDown from Consolidation (Short)

Stop Loss

Support Entry 2
Entry 1
Is this a Valid Breakout?

Entry?
Is this a Valid Breakout?

Entry?
 Scanning for Potential Breakouts
1) www.finviz.com ‘Channel Scan’
 Scanning for Potential Breakouts
2) www.finviz.com ‘Horizontal S/R Scan’

3) Screen using TC2000 EASY SCAN

 Lesson 2
Breakout from Consolidation
Momentum Trend Trading System

By Adam Khoo

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2020