How to trade Breakout/Breakdown from consolidation pattern?

1) What is a consolidation?

Consolidation means when the price of a stock or security moves sideways within a range.

In this pattern the price makes the same highs and/or same lows. The highs form a resistance level, and lows form a support level. The longer the consolidation is, the stronger the breakout/breakdown will be.
When the price is moving within the range you can not really predict if it will go up or down, you always have to wait for the breakout/down to enter the trade. Once the channel is broken it usually leads to a stronger up/downtrend.


Breakout
We are talking about Breakout pattern when the price that has been moving within the range of the consolidation pattern breaks above the previous resistance line. At this momentum,
when we have a confirmation candle, there is a high probability that it can be a start of a new uptrend, and we can enter the trade.

Breakdown
In case of a Breakdown, the price is moving downwards, and not only hit but breaks out of the support level. We need a confirmation candle to ensure that there is a high probability that bearish momentum will trigger the start of a new downtrend and it is a good time to enter short.


2) What are the valid consolidation patterns?

Consolidation pattern does not mean in every case that the price must make the same highs and the same lows at the same time. For a Breakout pattern from the consolidation we want to see a strong, flat top resistance line that is tested three times or more. The price can either make the same lows or higher lows.

On the other hand, when we are talking about a Breakdown from the consolidation, we are always looking for a strong support line that is tested at least three times before. In this case,
the consolidation pattern can be either making same highs or lower highs.


3) How to identify a Breakout/Breakdown momentum and which indicators to use?

We only want to enter the trade on a breakout/breakdown with a high probability of succeeding and for that we always want to see a confirmation candle after the price breaks above or below the range to avoid false breakouts. For a Breakout, the candle must be bullish and open and close above the resistance level and it must be near the 20EMA.
In case of a Breakdown the bearish candle body must open and close below the support line and the breakout candle must be near or touching the 20EMA.


Indicators (examples)

Force Index (13) measures the strength of the volume. When the Force Index is above the zero line, that tells you that the market is bullish. If the price goes under the line, the price is bearish. So, when we want to go long, make sure that the Force Index is above the signal line and it’s rising. When we want to sell, then the Force Index should be under the signal line and falling.
or
MACD (12,26,9) When the MACD line is above the signal line, it means that the momentum is bullish (good if you want to go long) if it goes under the signal line, means the market is bearish (great time to enter short).
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