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The Consolidation Breakout technical indicator identifies breakout in a congestion pattern. It does so by checking several conditions and then returning a value of one if a bullish congestion breakout is detected and a value of minus one if a bearish congestion breakout is detected. In case there is no breakout pattern, the trading indicator returns 0.
The conditions that must be met for the bullish and bearish breakout patterns are:
- The congestion index must be higher than the minimal congestion value
- The value of the congestion index 5 bars ago must be lower than the minimal congestion value
- The average volume for the last 5 bars must be higher than 1.5 multiplied by the average volume of the last 60 bars, 5 bars ago.
For the bullish breakout pattern:
- The close price must be higher than the highest close value of the last 20 bars, 5 bars ago.
For the bearish breakout pattern:
- The close price must be lower than the lowest close value of the last 20 bars, 5 bars ago.
The congestion index is calculated by taking the difference between the highest close price and the lowest close price for a specific period and then dividing the result by the lowest close price for the same period. Finally, the index value is multiplied by 100.
This period as well as the minimal congestion value should be passed as arguments to the Consolidation Breakout indicator.
The indicator name is "ConsolidationBreakout" and here is a simple formula example:
a = ConsolidationBreakout(80, 5) == 1;
The above trading rule returns a bullish signal when an upside consolidation breakout occurs. The indicator was called with 80 as a period to calculate the congestion index and 5 as a minimal congestion value.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
