Breakout

Trading
Newsletter
Explanatory Notes
Revision 0611

Breakout
Trading Newsletter
Explanatory Notes
Disclaimer
ActVest Pty Ltd is a Corporate Authorised Representative (CAR No.306718) of Avestra Capital Pty Ltd
AFSL 292 464 ("Avestra"). This document has been prepared for the general information of investors and
does not take into account the investment objectives, financial situation and particular needs of any
particular person. Persons intending to act on information in this document should seek professional advice
to confirm that the investments or strategies mentioned are appropriate in the light of their particular
investment needs, objectives and financial circumstances prior to taking any action. While reasonable care
has been exercised and the statements contained herein are based on information believed to be accurate and
reliable, neither ActVest, Avestra, nor their employees or agents shall be obliged to update you if the
information or its advice changes or be liable (unless otherwise required by law) for any loss or damage
suffered or caused to any person or corporation resulting from or contributed to by any error or omission
from such statements including any loss or damage caused by any fault or negligence on the part of ActVest
or Avestra, whether direct, indirect, consequential or otherwise, whether foreseeable or not. Direct investing
in the stock market can result in financial loss. This document, and any associated files, is intended solely
for its intended recipient. The contents are confidential and may be legally privileged.
.

Copyright Alan Hull 2010

This document is copyright. This document, in part or whole, may not be reproduced or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise without prior
written permission. Further enquiries can be made to Alan Hull, the author, on 061-03-9513 0070.
Correspondence can be forwarded to ActVest Pty. Ltd. ABN 44 101 040 939 at 53 Grange Drive,
Lysterfield, Victoria, 3156, Australia or via our website at http://www.alanhull.com

Contents.
Introduction

Key Features

Theory of Breakout Trading

The Calm before the Storm
Points of Agreement
Equilibrium to Chaos
The Breakout
Momentum

7
8
9
10
11

The Tool Box

Candlesticks
Pivot Points
Trend Lines (for Triangles)
Average True Range (Volatility Indicator)
MACD Indicator
MACD Bar

12
13
14
15
16
17

Breakout Patterns
Point of Agreement Patterns
Breakout Candles
Guidelines for assessing a Breakout Pattern

18
21
24

Strategy Specific Indicators

Stop Loss Indicator
Entry Limit Indicator

25
27

Risk Management
Position Risk
Sector Risk
Portfolio Risk
Investment Guidelines

28
29
29
29

The Trading Strategy

Search for New Trades
How to Enter a Trade
Example of a Entering a Trade
Example of a Trade in Progress
When to Exit a Trade
Example of Exiting a Trade

31
32
33
34
34
35
3

Second Wave Trades

2nd Wave Trading Strategy
2nd Wave Trade Indicators
How to Enter a 2nd Wave Trade
Guidelines for Choosing between 2nd Wave Trades
Example of Entering a 2nd Wave Trade
Example of a 2nd Wave Trade in Progress
When to Exit a 2nd Wave Trade
Example of Exiting a 2nd Wave Trade

36
37
37
38
38
39
40
41

Short Selling
Breakouts to the Down Side

42

Quick Guide
Newsletter Section s
How to Enter a Trade
Guidelines for Choosing Between Trades
When to Exit a Trade
Risk Management
Chart Features

43
43
44
44
45
45

When do I enter a trade?

What do I do if there are several New Trades to choose from?
Can I enter a share from the Trades in Progress section rather
than the New Trade section?
What do I do if my share does not appear in the Data Tables?
Why is there an Entry Limit? Some trades seem to go much further.
What does Hold mean? Can I still enter this share?
Is Breakout Trading a Daily or Weekly System?
What is a 2nd Wave trade?
How do I know if a trade is a Breakout Trade or a 2nd Wave Trade?

46
46

FAQ

46
46
46
46
46
47
47

Website & Free Sample Newsletter

47

Subscription Form

48

Introduction
Breakout trading is essentially momentum trading following a breakout from a Point of
Agreement; where a Point of Agreement (referred to as a POA) is when the share activity
consolidates into a narrowing trading range see chart below.
A key feature of this style of trading is that breakouts can occur regardless of market
conditions, whether it is a bull or bear market or even a sideways market. This is not a trend
trading strategy; instead breakouts from POAs are traded using momentum as a guide since
most rallies typically have significant momentum.

Breakout Trade
However, breakouts also occur during trends. So although this strategy focuses on trading
rallies, parts of trends tend to be captured anyway. But without a doubt, the strength of this
approach lies in its universality; finding opportunities in very difficult conditions including
non-trending periods or even turning points.
Breakout trades exist in many time frames but a weekly time frame is quite robust for trading.
This timeframe irons out daily volatility and allows some rallies to develop to very profitable
levels. Recent back testing indicates that the average length of a trade using a weekly
approach is about 9 weeks. Hence the system is a very nimble, relatively short term strategy
that requires less than 1 hour a week to operate.
The Breakout Trading Newsletter brings together all the essential elements for trading a
breakout strategy within the Australian Market by identifying breakouts that follow POAs
and applying trading tactics to capture the majority of any ensuing rally.
5

Key Features
! All terrain trading system
Breakout trades occur in most market conditions which will mean there will generally
be plenty of trading opportunities, regardless of market conditions. Recent back testing
identified over 100 trading opportunities in each year tested.

! High win rate set up

A breakout, such as described in this strategy is a high probability trade set up. Recent
back testing shows over 60% of trades were profitable. For a complete set of current
back testing results, please go to www.alanhull.com

! High profit ratio

Specifics of the strategy including the use of an entry limit and a momentum based
stop loss mean a high profit ratio is achievable. The average profit to loss ratio in
recent back testing was about 2.3:1

! Long and Short trading opportunities

Breakouts can be up or down which means that both Long and Short trading
opportunities can arise. However, the majority of trades tend to be Long; about 80%
in recent back testing, so Short trading opportunities are available but can be
overlooked depending on a Traders preference.

! High frequency trading (and therefore capital) turnover

Recent back testing indicates the average trade length is about 9 weeks. Thus the short
term nature of the strategy means the opportunity to rollover and therefore pyramid
your trading capital is very attractive.

! Double Search procedure.

All the hard work is done for you.

All trades that appear in the newsletter have resulted from the best of both a
mechanical search and rigorous discretionary analysis.

! 2 Stop Losses for added safety.

A Stop Loss made of 2 components is included.

It is partly an Initial Stop Loss, ensuring the breakout trade remains valid, and partly a
Trailing Stop Loss to make sure any profit is retained. Since the main exit criteria is
momentum based these stop losses are in fact secondary for safety sake and to apply
risk and money management.

! Risk & Money Management done for you with calculated position sizing
plus helpful guidance on sector and portfolio risk management

! Extra trading strategy called 2nd Wave Trading

to provide further
opportunities in a rising market. So you can capture initial profits from the point of
break out, as well as capturing further profits from ongoing trend behavior.

! Easy to Use Weekly Strategy

The newsletter brings together all of the above features into an easy to use system that
requires less than 1 hour a week to operate.
6

Theory of Breakout Trading

The Calm before the Storm
If the air seems very still, everything is quiet and on the horizon is a line of ominous clouds
then it is quite likely to be a calm moment before a storm. This is an intriguing weather
phenomenon that really does occur.
A similar type of pattern happens in the share market. In the centre of the chart below is a
region where the share price has gradually reduced to very little activity. The candles
became smaller indicating reducing volatility and the price movement is essentially sideways.
What follows, however, is like a storm. The price breaks out upwards with growing
momentum....

The Calm before the Storm

The scientific explanation of this weather phenomenon has
to do with storm clouds drawing in air from all around,
including from in front of the storm pathway.
Moisture is removed by the thunderclouds and the
resulting warm dry air circulates back into the vacuum
that was initially created in the region around the storm.
It is this warm dry air that has a stabilising, settling effect
that gives a feeling of calm.
7

This behavioural pattern in the stock market can be explained by understanding the forces in
a functioning market. A market can only exist when there is agreement on a sale price (in
order for a transaction to take place) and disagreement on the current or future value of the
product being traded. Disagreement on value is usually created because of differences in
perspectives or opinions.
Now if there was prolonged agreement on the value of a product then there would be no
market for it. For example, imagine a $50 note. Not many people would be willing to buy a
$50 note for $60. Nor would many people sell one for $40. This is because we all agree the
note has a value of $50. Therefore, there is no market for $50 notes.

Points of Agreement
So for financial markets to continue to exist there must be general disagreement. But
sometimes it seems that there is some agreement, such as when a share price pauses or
consolidates. When the apparent agreement becomes narrower and more focussed, it is called
a Point of Agreement (POA)
The period of calm in the chart on page 7 is an example of this happening. The same chart
has been reproduced over the page, where trend lines have been added to highlight the
triangular shape of the period in question. As the price moves towards the apex of the
triangle, the buying and selling forces become more in balance; that is, market participants
appear to be moving towards agreement. Usually this is further evidenced by a fall in trading
volume.
8

However, agreement cannot continue for an extended period or the market would lose all
liquidity and cease to exist.

From Equilibrium to Chaos

Thus, Points of Agreement are a kind of momentary equilibrium where things seem calm.
Perhaps falsely so, just like the calm before a storm. Because when market forces reach a
state of equilibrium it becomes very easy for new forces to come along and shift the share
price.
So the situation changes dramatically following a Point of Agreement. New market forces
drive the share price to break out from the triangles apex. The market moves away from
equilibrium and towards chaos; from general agreement back to general disagreement.
Volatility (and typically trading volume as well) increases and the price can take off either in
an upward or downward direction.
A particularly important point of this theory for Breakout Trading is that since the market
cannot continually narrow or move sideways it pretty much has to breakout one way or
another. For this reason POAs are a very powerful pattern that can be readily identified and
then exploited for profit by traders.

The Breakout
The transition from equilibrium to chaos occurs at the Breakout candle. This is the moment
when forces can suddenly become quite strong; where volatility, and often volume, suddenly
increase.
This is an extremely important part of the break out pattern. The candle not only confirms
the preceding triangle and Point of Agreement, but signals the direction of the coming rally
and provides an entry point for trading the ensuing rally. In other words, a trader would
typically enter at the start of the next trading period.

A breakout candle must make a significant move in relation to the POA and make a new
short term high (or a new low for a downward break out). These features can be identified
with a combination of mechanical and discretionary techniques.
The Breakout Trading strategy searches for these candles and then filters them for those that
occur directly after a Point of Agreement. All charts in the newsletter section headed New
Trades This Week will have a Breakout candle following an acceptable POA.

10

Momentum
Breakouts are more often than not, quite dramatic. Forces are shifting the state of the system
from equilibrium back to chaos; from agreement back to general disagreement. The length
and strength of the rally can vary but in each case the rate of change of the price (or
momentum) is typically increasing. For this reason momentum indicators are a good guide
for trading a break out rally.
In the chart below the MACD indicator, a momentum linked indicator has been added at the
top. A full explanation on the MACD indicator is on page 16. It shows how momentum (the
red line) turned up at the Breakout and continued to rise during the rally. Any weakness in
momentum will indicate an end of the Breakout price rally.

It is worth noting that a strong rally may just be the beginning of a long and stable trend.
However, the purpose of this trading strategy is to find short term trading opportunities in a
variety of market conditions. Therefore exiting a rally at the slightest slow down in
momentum is a key element of this approach.
An advantage to using momentum as a guide for exiting a break out rally is that it is often
triggered before the price falls too much (for LONG trades). This makes for nimble trading.
In this strategy there is the safety feature of a trailing stop loss but back testing results show
that the momentum exit is generally triggered first; thereby significantly improving trading
results versus using a trailing stop loss only.

11

The Tool Box

Candlesticks
Charts using candles for each time period are visually easy to understand. The larger section
of each candle is called the Real Body. The thin parts on the top or bottom are called
Shadows.

White Candle
A white candle is an UP
candle where the close is
higher than the open.

Black Candle
A black candle is a DOWN
candle where the close is
lower than the open.

Doji Candle
A Doji candle is where the
Open and Close are equal or
very similar.

12

Pivot Points
Price action moves in waves and Pivot Points are the high and low turning points of these
waves. The Breakout Trading strategy requires the identification of a previous short term
Pivot Point when identifying a Breakout Candle. For example, in LONG break out trading a
Breakout Candle must close above the highest CLOSE of the previous Pivot Point High.

13

Trend Lines (for Triangles)

Drawing trend lines and identifying triangles is discretionary so practice really helps. It is
best if the pattern jumps out at you before youre even drawn the lines on the chart. Then
adding the lines simply confirms what you are already seeing.

Definition
" A valid trend line must touch in at least 2 places in the past
" Triangles must incorporate all the real bodies (see page 12) of the candles.
Guidelines
" 3 touches to a trend line are better than 2. The more touches the better.
" Whilst the real bodies of the candles must be within the triangle, a trend line can sit on
the bodies or the shadows or a combination of both.
In the following charts the triangle is drawn in 2 different ways. The first uses the shadows
of the candles whilst the second uses the real bodies. Both are considered acceptable.

Here, the Trend Lines have

been placed on the Shadows
of the candles

Here, the Trend Lines have

been placed on the Bodies of
the candles

14

Average True Range (Volatility)

Volatility is the measure of how far the price moves in a period of time. The size of each
candle is a basic way to assess general volatility. However, in order to be more
specific/mechanical in measuring volatility for this trading strategy we use an indicator
called Average True Range (ATR). This was developed by American trader and author, J.
Welles Wilder.
Wilder created the concept of 'true range'. This defines the volatility of price activity by
taking into account both the price range during any given trading period and price
movements between trading periods. He defined 'true range' as being the largest of three
measurements as described in the following diagram.

True range is based on the two most recent trading periods and is of little use for measuring
price volatility over a longer period of time. To do so we have to calculate the 'average true
range' using a period of time that we are interested in.
In this strategy a period of 17 is being used since recent back testing indicates this is the
average length of a triangle. This is relevant since a Breakout candles volatility can be
related to the average volatility of the preceding triangle. Obviously this figure is subject to
constant review as market conditions change.

15

MACD Indicator
MACD is an acronym for Moving Average Convergence Divergence and was developed by
Gerald Appel. It is calculated by subtracting the 26 period exponential moving average
(EMA) from the 12 period EMA. A reference line is added which has a 9 period EMA of the
MACD, see chart below.
To understand the MACD indicator; consider that it is a difference between two moving
averages. If the MACD line is rising it means the faster moving average is rising quicker
than the slower moving average. This implies an increasing rate of change of the price
which is, by definition, momentum.
This ideally suits our requirement in breakout trading where a rally normally has increasing
momentum. The rally can be tracked with the MACD. Any slowdown in the MACD line
will be a slowing in the rate of change of the price (momentum) and therefore a likely end to
the price rally.
In this trading strategy we are using the default settings as recommended by Appel for the
MACD and its reference line. As these settings are well suited to breakout trading Australian
equities (as confirmed through back testing), then there is no reason to change them. Of
course system performance is monitored to ensure the settings remain suitable.

16

MACD Bar
Reading the detail of the direction of the red MACD line in the charts can sometimes be a
little difficult without zooming in. So we have placed a coloured MACD bar on each chart in
the newsletter. This gives the same information as the MACD indicator but it is easier to
read at a glance. Heres how
The MACD bar is light blue if the MACD line is rising and above the reference line. It is
red if the MACD line is falling and below the reference line. At any other time it is grey.
For example, when trading a LONG Breakout trade the MACD bar must be light blue. If it
changes to grey or red this is an exit signal.

17

Breakout Patterns
A Breakout Pattern includes both a Point of Agreement (POA) and a Breakout Candle.
Details of each of these parts of the pattern are discussed below.

Point of Agreement (POA) Patterns

The shape of a Point of Agreement will almost always be triangular. However, triangles do
come in various shapes and sizes. They can be ascending, descending, equilateral or wedge
shaped. This section shows an assortment of triangles that fit the POA criteria. The main
notion is that the price is consolidating and narrowing within the triangle.

Definition
A Point of Agreement MUST have the following characteristic. This is essential for a POA
to be valid.

" Price activity can be captured by converging trend lines

Guidelines
A Point of Agreement MAY have the following characteristics. These are not always
present but the more of these characteristics a POA has, the better.

"
"
"
"

Reducing volatility
Reduced or reducing volume
The MACD (red line) and its reference line are converging
Doji candle(s) prior to the Breakout (see page 12)

An Equilateral Triangle
has a sloped upper line and
a sloped lower line. The
lines are converging.
These triangles can break
either up or down

18

In an Ascending Triangle
the upper line is horizontal,
acting as resistance to the
price while the lower line is
sloped upwards.
These are quite common in
up trends.

In a Descending Triangle
the lower line is horizontal,
acting as support to the
price while the upper line
is sloped downwards.
These are quite common in
down trends.

A wedge has an upper and

lower line sloped in the
same direction and they are
also converging.
A wedge is a valid POA,
however, they are not very
common and can be quite
difficult to identify.

19

The following charts illustrate some of the attributes that MAY be seen in a POA. These are
not essential but improve recognition and the quality of the pattern.

20

Breakout Candles
Definition
A Breakout candle MUST have the following characteristics. These are essential for a
Breakout to be considered valid and appear in the Newsletter.
For LONG breakout trades the Breakout Candle MUST have
" A close outside the Trend Lines
" A close above the highest close of the previous pivot point high
" A close above its midpoint (meaning the Breakout candle itself)
" A close above the previous candle by at least half the ATR(17)
" The MACD line is above its reference line and rising
" A close greater than 20 cents to help ensure there is sufficient liquidity
For SHORT breakout trades the Breakout Candle MUST have
" A close outside the Trend Lines
" A close below the lowest close of the previous pivot point low
" A close below its midpoint
" A close below the previous candle by at least half the ATR(17)
" The MACD line is below its reference line and falling
" A close greater than $1 to help ensure there is still enough room above zero for the
share price to continue falling for a reasonable period.

Guidelines
A Breakout Candle MAY have the following characteristics. These are not always present
but the more of these characteristics a Breakout Candle has, the better.

"
"
"
"

Increase in volatility
Increase in volume
MACD line separates from its reference line
A gap occurs between the previous candle and the Breakout Candle

21

In the chart below the Breakout Candle is strong and relatively large. It fulfils all the
mandatory requirements including closing above the highest close of the previous pivot point
high. Note that the MACD and its reference line are opening up and there is strong volume.

In the next chart the Breakout Candle is not strong. It has a long upward tail and has closed
below its mid-point. Also note that the MACD line is not above its reference line. This is
not a valid Breakout.

22

The chart below shows a valid Breakout Candle. Note there is a gap preceding the Breakout
Candle which is a plus. It is also worth noting that the second last candle in this chart may
look like a Breakout Candle; however the MACD line was not above its reference line at that
point, thus invalidating it as a break out candle.

23

Guidelines for choosing between Breakout Trades

All charts that appear in the New Trades section of the newsletter are acceptable
Breakout trades according to this strategy. However if you want to be a bit more discerning
here are some guidelines.

Point of Agreement Attributes

" The POA clearly looks like it is narrowing and focussing into a point
" The POA has significantly smaller candles towards the point; preferably Doji like ones
" The POA is well contained within the trend lines; with minimal tails poking up or
down, and plenty of touches to the Trend Lines confirming their placement.

" There is reduced volume at the point of agreement

Breakout Attributes
" The Breakout Candle looks strong with the close near the high
" The MACD indicator is opening up on break out
" There is a gap between the Breakout Candle and the preceding candle
" There is strong volume with the break out.

24

Strategy Specific Indicators

Stop Loss
For risk & money management purposes it is essential to have a Stop Loss. This is a price
level that follows along with a trade at a certain displacement. It will move in the direction
of the trade if the price advances, at a given displacement, but will not retrace if the price
retraces. In this manner, any advance in price means more capital is protected.
In this strategy there are two parts to the Stop Loss. The first part is an Initial Stop Loss
which ensures the Breakout Pattern remains valid during the trade while the second part is a
Trailing Stop Loss that follows price as it progresses.
The Stop Loss Indicator is a combination of these two components; taking the value that has
advanced the most in the direction of the trade.

Part 1 - Initial Stop Loss

Each Breakout from a Point of Agreement (POA) indicates the market is rejecting the POA
and wants to move away from it. Therefore, if the price retraces back to the POA or moves
past it after a break out, it means the break out is no longer valid. Note that, like any other
chart pattern, breakouts can fail.
For this reason, the Initial Stop Loss should be set at the POA. A mid-line through the
triangle gives a guide as to where the theoretical POA should lie. The Initial Stop Loss is
placed on this line starting at the point of break out.

25

Part 2 - Trailing Stop Loss

The Trailing Stop Loss part of the Stop Loss indicator uses the Chandelier approach as
described by Chuck LeBeau. As the name suggests, a Chandelier Stop Loss hangs down
from the highest high of the trade for LONG trades (or hangs up from the lowest low of the
trade for SHORT trades). The reason this method is used is because it is instantly reactive
to any advance in price which is necessary when trading a strong rally.
The trailing part of the Stop Loss uses a set displacement of 2 times the ATR (17) from the
highest high (or lowest low). A move either way of one ATR (17) is expected, given that this
is supposedly representative of normal price volatility. However a retracement of more than
two ATRs is abnormal and most likely signals a change in market direction.

26

Entry Limit Indicator

The breakout strategy described here is a nimble short term strategy. This means it is a good
idea to get into a trade fairly promptly. Therefore an Entry Limit indicator has been devised
to avoid chasing a rally too far.
The Entry Limit is set as 2.5 times the ATR (17) above the Stop Loss at the beginning of the
trade. Since one times the ATR move would be an normal move, based on the calculation of
the ATR, a 2.5 times the ATR is room enough for the Breakout Candle to have made a
decent break but still allow an entry before the price has run too far. Recent back testing
confirms this.
The Entry Limit is calculated once, at the Breakout Candle and is indicated on each chart in
the newsletter as a magenta line. This level stays fixed for the entire trade. Entry into a
breakout trade should be made at a price between the Entry Limit and the Stop Loss,
preferably in the week immediately following the Breakout Candle.

27

Risk Management
Position Risk
The potential loss in owning each share is referred to as Position Risk. Traders normally use
the 2% rule that states;

The total loss for any single trade must not exceed 2% of total capital
Your total capital is the current value of all shares held plus the total amount of cash on hand.
By risking only 2% of our total capital on each trade it would take 194 consecutive losses to
lose all of our moneya situation that rarely occurs.
The following example shows how the 2% risk rule can be used to calculate your position
size in order to only risk 2% of capital in any one trade. To do the calculation you will need
to know your Total Capital, the entry price and the Stop Loss for the share you intend to
purchase.

Example
" We are trading with $20,000 total capital and using the 2% risk rule
" Assume that the closing price of a share is $12 and the Stop Loss is set at $10. It is
"
"
"
"

always assumed that the closing price is the probable entry price.
The potential loss per share is $12 - $10 = $2 and 2% of $20,000 = $400
Divide $400 by $2 to get the number of shares we can buy = 200 shares
Multiply 200 by the closing price of $12 to get the position size = $2,400
Divide $2,400 by $20,000 and multiply by 100 to get the percentage of total capital
that can be spent on this position = 12%. This is the maximum position size for this
share in this example using the 2% risk rule.

The Data Tables of the newsletter provide you with the %Portfolio figure for each trade
based on using the 2% risk rule. This can easily be used to calculate your position size as
follows:
Position Size = (Your Total Capital) x %Portfolio
Number of Shares = Position Size / Share Price

Example
" We are trading with $20,000 total capital.
" The share we have chosen has a closing price of $5 and a %Portfolio figure of 13%
" Position size = $20,000 x 13% = $2,600
" Number of Shares = $2,600 / $5 = 520 shares
Rule

The 2% risk rule has been incorporated into the %Portfolio figure.
%Portfolio figure in the Data Tables to calculate your position size.
28

Use the

Sector Risk (Also referred to as Industry Risk)

We want to be able to capitalize on strong sectors without being exposed to a sector bubble.
To limit our exposure we will only allocate a maximum of 40% of our total capital per sector
and a maximum of 6% position risk per sector, i.e. 3 positions per sector. (3 x 2% = 6%)

Guidelines

!
!

Maximum of 40% of Total Capital per Sector

Maximum of 3 positions per Sector

Portfolio Risk
Portfolio risk is the sum total of our position risk. Our portfolio can only have a maximum of
10 shares. No single position can be greater than 20% of our total capital. By using the 2%
position risk rule we will probably own somewhere between 6 and 9 different positions.
Note that the more positions we have; the higher the portfolio risk.

Rules

!
!

Maximum of 10 shares
Maximum of 20% of Total Capital per position (%Portfolio figure is limited to 20%
thus helping you to maintain prudent Portfolio Risk)

Investment Guidelines
The Breakout Trading strategy is a short term, medium risk approach that often identifies
relatively low liquidity shares. It has been designed to work alongside and compliment well
proven Trend Trading strategies such as the ActVest Newsletter and the Blue Chip Report.
The following guidelines are strongly recommended to investors/traders for capital allocation.
Within these guidelines the Breakout Trading strategy would fit in as medium risk strategy.

Guidelines

!
!
!

60% Blue Chip shares

30% Medium risk strategy
10% Speculative strategy

(the Blue Chip Report and the ActVest Newsletter)

(the ActTrade and the Breakout Trading Newsletters)
(leveraged instruments; CFDs, Forex, Futures, etc.)

29

Product Integrity
Since this trading strategy often identifies relatively low liquidity shares there may be some
risk to the integrity of the approach if a large number of traders overwhelm the market in
some shares. To manage this risk there is a limit of 500 subscriptions available at any one
time. The strategy particulars and the number of subscribers are reviewed regularly to help
ensure the integrity of the strategy is maintained for current subscribers.

Trading a new strategy

The correct application of a trading strategy ideally requires understanding the theory, rules
and guidelines of the system and how to execute them. It is important that you do your own
due diligence, and paper trade the system for a few months to acquaint yourself with the
workings of the system and the results it will produce. This paper trading period will also
provide you with invaluable practice.

Trade Recorder
Good record keeping is paramount to successful trading. It will help you maintain sound
risk and money management and will keep track of your performance. A spreadsheet based
Trade Recorder is available for purchase from ActVest P/L. If you are interested in more
information on this then please send an email to [email protected] or see the
advertisement for the ActVest Trader Recorder in the weekly Breakout Trading Newsletter.

30

The Trading Strategy

Shares that appear in the newsletter have undergone two filtering processes. Firstly, all
shares in the Australian Top 300 shares (by market capitalisation) are scanned for valid
Breakout Candles. This is done using a mechanical process.
All search procedures in this strategy are carried out on a weekly basis and, hence, all
patterns and charts are based on weekly data. Breakouts do occur in all time frames;
however a weekly time frame is a robust one for trading. It filters out daily volatility, allows
some rallies to develop to very profitable levels and provides us with an easy to use and
convenient weekly system.
The results from the mechanical search are then scanned via discretionary means for
Breakouts that have occurred following a Point of Agreement. The Stop Loss and the Entry
Limit indicators are applied to these charts and they are listed in the first section of the
newsletter as New Trades This Week.

! Check out New Trades This Week in the newsletter every week

Example of a New Trade Chart

The newsletter also provides a second strategy called Second Wave trading. This provides
further opportunities in a rising market. A 2nd Wave trade is a second go at a LONG trading
opportunity if the Breakout trade has finished but the share has then begun to rise again.
31

The newsletter presents 2nd Wave trades in the same way as Breakout trades. That is, with a
Stop Loss and a NEW Entry Limit. Any new 2nd Wave trades that occur will appear in the
New Trades section of the newsletter alongside new Breakout Trades. There is a further
explanation of 2nd Wave trades on page 37.

Data Tables
The charts give a great visual guide for each trade. But for the specifics of each trade, please
refer to the Data Tables. This section displays details as follows:

"
"
"
"
"
"

Share code (eg. ABC)

Type of trade (Breakout or 2nd Wave trade)
Closing price of the share for the week
The Entry Limit for the share.
The Stop Loss for the share.
The direction of the MACD indicator, which can sometimes be difficult to read on the
chart without zooming.
" The %Portfolio figure for calculating your position size.
" An Action column. This provides you with clear guidelines for trading. All the hard
work is done for you. Simply follow the instructions;
Exit
Hold
Check Entry

= Exit this share in the following week if you hold it.

= Hold this share if you have a position in this share.
= You may be able to enter this share. But you will need to
check that you can get a price between the Stop and the
Entry Limit.

How to enter a trade

Choose a share from the charts. Any chart from the New Trades section will be
suitable and some of the existing trades may also provide an entry opportunity. In the
case of new trades, you can also use the Guidelines on page 24 to be more discerning
in your choice if you wish.

Ensure your entry price is between the Entry Limit and the Stop Loss. These are
shown on each chart and specific figures are quoted in the Data Tables at the end of
the newsletter.

Use the %Portfolio figure in the Data Tables to calculate the number of shares to
purchase as follows:
Position Size = (Your Total Capital) x %Portfolio
Number of Shares = Position Size / Share Price
32

Example of Entering a Trade

XYZ

" We are trading with $20,000 Total Capital.

" We have chosen a share XYZ, see chart above, with the following Data Table entry:
Share
Code

Trade
Type

Closing
Price

Entry
Limit

Stop
Loss

'XYZ'

Breakout

18.530

19.470

16.850

MACD
Direction %Portfolio
Up

16%

Action
Check Entry

" Therefore, we can buy 16% of our Total Capital at a price between the Entry Limit
($19.47) and the Stop Loss ($16.85)
" Assume we buy at $18.75 in the following week
" Position size = $20,000 x 16% = $3,200
" Number of Shares = $3,200 / $18.75 = 170 shares (rounded down)
Therefore, we can buy 170 shares in XYZ at $18.75 (excluding brokerage).
After appearing in the New Trades section for an initial week shares then move to the
Trades in Progress section where they stay until after an exit is triggered via either the
MACD indicator or the Stop Loss. The charts in this section display the trade as it
progresses with the POA and Entry Limit remaining intact and the MACD and Stop Loss
moving along with the price action.
33

Example of a Trade in Progress XYZ

XYZ

" Our XYZ trade is progressing well, see chart above.

" The Stop Loss is now above the Entry Limit and therefore, according to the
strategy, you can no longer enter this trade. However, if you own this share then
continue to hold the position.
" Because the Stop Loss is above our entry price it is very likely we will make a profit.
" This share will currently display Hold in the Action column of the Data Tables

When to exit a trade

Monitor your trades each week using the Data Tables. If the Action column for any of
your shares reads Exit then close that position in the following week. An Exit is triggered
via either the MACD indicator or the Stop Loss as follows:

Exit a Breakout LONG Trade if

i.
The MACD line has turned down or
ii.
The price has closed below the Stop Loss at end of week

Exit a Breakout SHORT Trade if

i.
The MACD line has turned up or
ii.
The price has closed above the Stop Loss at end of week

Exit a 2nd Wave LONG Trade if

i.
The MACD line has crossed below the reference line or
ii.
The price has closed below the Stop Loss at end of week
34

Daily Signals - optional

This strategy is a weekly system and all recent back testing results are based on waiting for
the end of week signal. However, there is the option to exit during the week if the price
closes past the Stop Loss at the end of the day. A trader may choose to do this if, for
example, the market was in a very nervous and uncertain state.

Example of Exiting a Trade XYZ

XYZ

" Our trade had progressed significantly before the MACD line started to fall, see the
above chart.
" Once the MACD line turned down, Exit appeared in the Action column of the
Data Tables in the newsletter
" The trade was closed during the following week
Note that the MACD indicated an exit BEFORE the Stop Loss was hit. This shows how the
momentum indicator is very responsive in a breakout rally.

"
"
"
"
"

We closed our trade at $23.69.

We had 170 shares
Initial Capital Outlay = 170 * $18.75 = $3,187.50
Final Capital = 170 * $23.69 = $4,027.30
Profit = $4,027.30 - $3,187.50 = $839.80 excluding brokerage

The profit from this example trade is about a 26% gain on capital (excluding brokerage) over
the 12 weeks in the trade.
35

Second Wave Trading

The newsletter also provides a second strategy called Second Wave trading. This provides
further opportunities in a rising market. So you can capture initial profits from the point of
break out, as well as any ongoing trending behaviour.
Price action moves in waves. Sometimes a Breakout Trade may be the first of many waves
if the share establishes itself in a stable upward trend. Primarily this newsletter strategy is
involved with catching the first rally. However, if the first rally ends with the MACD turning
down but then it continues to rise without crossing the reference line, then this is an
opportunity to take another bite of the cherry, via a 2nd wave trade.

2nd Wave

The above chart shows an example of a 2nd Wave Trade. Firstly the Breakout Trade
occurred after a Point Of Agreement. It was given an exit signal when the MACD line
turning down, marked by the blue down arrow.
Shortly after, the MACD line turned up again before it crossed its reference line or tripping
the Stop Loss. This was the entry signal for the 2nd Wave Trade.
An important point to note is that 2nd Wave trades are not break out rallies; they do not occur
as the result of a breakout. Rather, they are a trend type of trade and for this reason the exit
signal is a complete cross of the MACD line with its reference line.

36

Long or Short Trading for 2nd Wave?

As already discussed, break outs can go up or down which means LONG and SHORT
Breakout Trades are possible. And although recent back testing shows that the majority of
Breakouts are to the upside (about 80% are up), downward break outs are as profitable as
upward ones.
However, 2nd wave trades are a different story. Markets often trend up after a break out rally
but are less likely to trend down after a break out down rally. Markets are not symetrical;
there is a bias to the upward direction. Therefore, the 2nd wave trading strategy in this
newsletter is only for LONG trades.

Rules

Enter a 2nd Wave Trade if a LONG Breakout trade has finished and the MACD has
turned up if
i. The MACD has not crossed with its reference line and
ii. The Stop Loss has not been triggered.

Exit a 2nd Wave Trade if

i. The MACD has crossed with its reference line or
ii. The price has closed below the Stop Loss at the end of the week

2nd Wave Trade Indicators

The same Stop Loss used in Breakout trading is used for 2nd Wave trades. However the
Entry Limit is slightly different. The Entry Limt for 2nd Wave trades is 2 time the ATR (17)
above the Stop Loss, rather than 2.5 times the ATR (17) as it is for Breakout trading. This is
because a 2nd Wave trade generally starts after a pullback from the end of the Breakout rally
and therefore requires less room for entry.

How to enter a 2nd Wave Trade

The newsletter presents 2nd Wave trades in the same way as Breakout trades. New 2nd Wave
trades will appear in the New Trades section if an entry signal has occurred.

Choose a share from the charts. Any chart from the New Trades section will be
suitable and there may be some trades already in progress that are also still offering a
possible entry.

Ensure your entry price is between the Entry Limit and the Stop Loss. These are
shown on each chart and specific figures are quoted in the Data Tables at the end of
the newsletter.

Use the %Portfolio figure in the Data Tables to calculate the number of shares to
purchase as follows:
Position Size = (Your Total Capital) x %Portfolio
Number of Shares = Position Size / Share Price
37

As a 2nd Wave trade is a trend type of trade rather than a break out trade the guidelines for
choosing between trade possibilities are a little different. Some basic guidelines are listed
below. Remember that a 2nd Wave trade entry is into a trend type trade following a pull back
from a break out exit.

Guidelines for choosing between 2nd Wave Trades

All charts that appear in the New Trades section are acceptable. However if you want to
be a bit more discerning here are some guidelines.

" The pullback after the break out exit has not been excessive more of a sideways
pause rather than down

" The entry candle is strong looking with a close near its high
" The MACD line has opened up away from the reference line
" There is increased volume with the entry candle
Example of Entering a 2nd Wave Trade

ZYX

2nd Wave

" We are trading with $20,000 Total Capital.

" We have chosen a share ZYX, see chart above, with the following Data Table entry:

38

Share
Code

Trade
Type

Closing
Price

Entry
Limit

Stop
Loss

'ZYX'

2nd Wave

2.750

2.802

2.503

MACD
Direction %Portfolio
Up

18%

Action
Check Entry

" Therefore, we can buy 18% of our Total Capital at a price between the Entry Limit
($2.802) and the Stop Loss ($2.503)
" Assume we buy at $2.71 in the following week
" Position size = $20,000 x 18% = $3,600
" Number of Shares = $3,600 / $2.71 = 1328 shares (rounded down)
Therefore, we can buy 1328 shares in ZYX at $2.71 (excluding brokerage).
After appearing in the New Trades section for an initial week shares then move to the
Trades in Progress section where they stay until after an exit is triggered via either the
MACD indicator or the Stop Loss.
The charts in this section display the trade as it progresses with the Entry Limit remaining
intact and the MACD and Stop Loss moving along with the price action.

Example of a 2nd Wave Trade in Progress ZYX

ZYX

2nd Wave

39

" Our ZYX trade has progressed well, see chart above.
" The Stop Loss is now above the Entry Limit therefore, according to the strategy, it
is not recommended to enter this share. However, if you own this share, continue to
hold the position.
" Because the Stop Loss is above our entry price it is highly likely we will make a
profit.
" This share will display Hold in the Action column of the Data Tables
Note that the MACD is falling. However since this is a 2nd Wave trade this is NOT an exit
signal. An exit for a 2nd Wave trade is when the MACD crosses below its reference line or
closes below the Stop Loss.

When to exit a trade

Monitor your trades each week using the Data Tables. If the Action column for any of
your shares reads Exit then close that position in the following week. An Exit is
triggered via either the MACD indicator or the Stop Loss as follows:

Exit a 2nd Wave LONG Trade if

i. The MACD line has crossed below the reference line or
ii. The price has closed below the Stop Loss at the end of the week

As with Breakout trading all the hard work is done for you as Exit will be placed in the
Action column of the Data Tables if either of the above conditions is met.

Daily Signals - optional

This strategy is a weekly system and all recent back testing results are based on waiting for
the end of week signal. However, there is the option to exit during the week if the price
closes past the Stop Loss at the end of the day. A trader may choose to do this if, for
example, the market was in a very nervous and uncertain state.

40

Example of Exiting a 2nd Wave Trade ZYX

ZYX

2nd Wave

" Our trade had progressed well before the MACD line crossed below the reference line,
see chart above.
" This was an exit signal and Exit appeared in the Action column of the Data
Tables in the newsletter
" The trade was closed during the following week

Profit Analysis
"
"
"
"
"

We closed our trade the following week at $3.89.

We had 1328 shares
Initial Capital Outlay = 1328 * $2.71 = $3,598.88
Final Capital = 1328 * $3.89 = $5,165.92
Profit = $5,165.92- $3,598.88= $1567.04 excluding brokerage

The profit from this example 2nd wave trade is about 43% gain on capital (excluding
brokerage) for a trade that was 22 weeks long.

41

Short Selling
The majority of break outs occur to the up side. Recent back testing indicates that about
80% of break outs are up. Yet break outs do occur to the down side and can be traded with
Short selling. Below is an example of a SHORT Breakout trade.

Short Breakout trades in the newsletter are handled in the same way as LONG trades. That
is, enter at a price between the Entry Limit and the Stop Loss promptly after a Breakout to
the down side, and exit when either the MACD turns up or the price closes above the Stop
Loss at the end of the week.
There are practical difficulties involved with short selling where the most common way of
short selling is with the aid of CFDs (Contracts For Difference). The use of CFDs and other
derivative products for short selling is beyond the scope of these explanatory notes but care
should always be taken when employing derivatives of any kind as they usually provide
leverage. It should also be noted that many shares cant be short sold (as there are no suitable
derivatives available) and so there is also an opportunity risk with short selling.
Furthermore, there is also the psychological discomfort for some of us of obtaining financial
gain through someone else's demise. If you fall into this category or find the science of short
selling difficult to comprehend then dont do it. It is not an essential component of Breakout
Trading and the Stockmarket is not a place where anyone should be operating outside their
comfort zone.

42

Quick Guide

(next 3 pages)

Shares that appear in the newsletter have undergone two filtering processes. Firstly all
shares in the Australian Top 300 are searched via mechanical means for valid Breakout
Candles. The results are then scanned via discretionary means for Breakouts that follow a
Point of Agreement (POA).
New Trades This Week
This section contains new Breakout Trades from the market scan plus any new 2nd Wave
Trades from previously closed out break out trades.
Trades in Progress
After 1 week trades move from the New Trades section to the Trades in Progress
section. They remain here until after an exit has been triggered. An exit is triggered by
either the MACD indicator or the Stop Loss at the end of the week.
Data Tables
The Data Tables list the specific information required for entering, exiting and position
sizing. An Action column is included which does all the hard work for you and indicates
either
Exit
Hold
Check Entry

= Exit this share in the following week if you hold it.

= Hold this share if you have a position in this share.
= You may be able to enter this share. But you will need to
check that you can get a price between the Stop and the
Entry Limit.

How to enter a trade

!

Choose a share from the charts. Any chart from the New Trades section will be
suitable and some of the existing trades may also provide an entry opportunity. In the
case of new trades, you can also use the Guidelines over page to be more discerning in
your choice if you wish.

Ensure your entry price is between the Entry Limit and the Stop Loss. These are
shown on each chart and specific figures are quoted in the Data Tables at the end of
the newsletter.

Use the %Portfolio figure in the Data Tables to calculate the number of shares to
purchase as follows:
Position Size = (Your Total Capital) x %Portfolio
(e.g. PS =$100,000x16% =$16,000)
Number of Shares = Position Size / Share Price
(e.g. No. =$16,000 / $2.50 =6400 shares)
43

Guidelines for choosing between Breakout Trades

Point of Agreement Attributes
" The POA clearly looks like it is narrowing and focussing into a point
" The POA has significantly smaller candles towards the point; preferably Doji like ones
" The POA is well contained within the trend lines; with minimal tails poking up or
down, and plenty of touches to the Trend Lines confirming their placement.
" There is reduced volume at the point of agreement

Breakout Attributes
"
"
"
"

The Breakout Candle looks strong with the close near the high
The MACD indicator is opening up on break out
There is a gap between the Breakout Candle and the preceding candle
There is strong volume with the break out.

Guidelines for choosing between 2nd Wave Trades

" The pullback after the break out exit has not been excessive more of a sideways
pause rather than down
" The entry candle is strong looking with a close near its high
" The MACD line has opened up away from the reference line
" There is increased volume with the entry candle

When to exit a trade

Monitor your trades each week using the Data Tables. If the Action column for any of
your shares reads Exit then close that position in the following week.

Exit a Breakout LONG Trade if

iii. The MACD line has turned down or
iv.
The price has closed below the Stop Loss at end of week

Exit a Breakout SHORT Trade if

iii. The MACD line has turned up or
iv.
The price has closed above the Stop Loss at end of week

Exit a 2nd Wave LONG Trade if

iii. The MACD line has crossed below the reference line or
iv.
The price has closed below the Stop Loss at end of week
44

Risk Management
Position Sizing Rule

The 2% risk rule has been incorporated into the %Portfolio figure. Use the
%Portfolio figure in the Data Tables to calculate your position size.

Sector Analysis Guidelines

!
!

Maximum of 40% of Total Capital per Sector

Maximum of 3 positions per Sector

Portfolio Risk Rules

!
!

Maximum of 10 shares
Maximum of 20% of Total Capital per position (%Portfolio figure is
limited to 20% thus helping you to maintain prudent Portfolio Risk)

Chart Features

45

FAQ
When do I enter a trade?
It is best to enter a New Trade fairly promptly, such as during the open of the market in the
following week. The main consideration is that you enter at a price between the Stop Loss
and Entry Limit.

What do I do if there are several New Trades to choose from?

Any chart from the New Trades section will be suitable; however, you can use the
Guidelines on page 23 to be more discerning in your choice if you wish.

Can I enter a share from the Trades in Progress section rather than the New
Trade section?
It may be possible to enter a share from the Trades in Progress section if you can get an
entry price between the Stop Loss and the Entry Limit. However, it is preferable to enter
trades promptly after the break out as some of the best trades take off quickly. Those that
pause may or may not keep going.

What do I do if my share does not appear in the Data Tables?

It is important to check the Data Tables each week if you have any trades open. Any Exit
that is triggered will appear in the Action column of the Data Tables; but for 1 week only.
If your share does not appear it is likely an exit was triggered previously and you should
close the position as soon as possible.

Why is there an Entry Limit? Some trades seem to go much further.

The Entry Limit is there so traders can avoid chasing a run-away rally. The majority of
trades usually allow 1 or 2 weeks for entry so there is often plenty of time. New trades occur
regularly so if one trade is missed, dont worry, there will be many more in the future.

What does Hold mean? Can I still enter this share?

A Hold remark in the Action column means that the Stop Loss is above the Entry Limit
and therefore entry into this share is not recommended.
If you already own this share then continue to hold the position as you will most likely be in
profit by now. Hence you should hold this share until an exit is triggered.

Is Breakout Trading a Daily or Weekly System?

This strategy is a weekly strategy where all the signals and charts operate on a weekly basis.
There is the option to exit if the price closes past the Stop Loss on an end of day basis if, for
example, a trader felt the market was very uncertain.
46

What is a 2nd Wave trade?

A 2nd Wave trade is a second go at a LONG trade opportunity if the Breakout trade has
finished but the share has dipped and then begun to rise again.
2nd Wave trades use the MACD indicator for the entry and the exit. If the MACD has turned
down signalling an exit from a Breakout trade but then turns up again before crossing the
reference line it signals a 2nd opportunity. It is NOT another breakout trade but, rather, a
trend type trade and therefore looks for a cross of the MACD line with its reference line as
an exit signal.
The newsletter presents 2nd Wave trades in the same way as Breakout trades. That is, enter
at a price between the Stop Loss and the NEW Entry Limit listed in the Data Tables. Exit
when the Action says Exit. An exit is triggered if the MACD has crossed below its
reference line or the price has fallen below the Stop Loss at the end of the week.

How do I know if a trade is a Breakout Trade or a 2nd Wave Trade?

The Data Tables have a column which labels each share with its Trade Type. Also, charts
will have a label indicating if they are a 2nd Wave trade. These charts will also have a second
Entry Limit level marked on in Grey. Otherwise the chart will be a Breakout Trade.

Website and Free Sample Newsletter

If you would like a sample copy of the newsletter please go to the website and click on the
Free Sample link to download. Alternatively, you can send an enquiry to the email
address below asking for a sample newsletter.
Website:

www.alanhull.com

Email: [email protected]

47

Breakout Trading Newsletter Subscription form

DISCLAIMER
ActVest Pty Ltd is a Corporate Authorised Representative (CAR No.306718) of Avestra Capital Pty Ltd
AFSL 292 464 ("Avestra"). This document has been prepared for the general information of investors and
does not take into account the investment objectives, financial situation and particular needs of any
particular person. Persons intending to act on information in this document should seek professional advice
to confirm that the investments or strategies mentioned are appropriate in the light of their particular
investment needs, objectives and financial circumstances prior to taking any action. While reasonable care
has been exercised and the statements contained herein are based on information believed to be accurate and
reliable, neither ActVest, Avestra, nor their employees or agents shall be obliged to update you if the
information or its advice changes or be liable (unless otherwise required by law) for any loss or damage
suffered or caused to any person or corporation resulting from or contributed to by any error or omission
from such statements including any loss or damage caused by any fault or negligence on the part of ActVest
or Avestra, whether direct, indirect, consequential or otherwise, whether foreseeable or not. Direct investing
in the stock market can result in financial loss. This document, and any associated files, is intended solely
for its intended recipient. The contents are confidential and may be legally privileged.
Acknowledgment

I, the undersigned, acknowledge that I have read and understand the above advice and disclaimer.
I acknowledge that ActVest P/L ABN 44 101 040 939 must retain my credit card details, as supplied
below, for the purpose of charging me $49.50 including GST on the 1st day of each month for my
Breakout Trading Newsletter subscription and that, should I elect to discontinue my subscription, I must
notify ActVest P/L in writing.
I acknowledge that I will at all times in the future indemnify Alan Hull and his servants and/or agents
against all actions, liabilities, proceedings, claims, costs and expenses which I may suffer, incur, or
sustain in connection with, or arising in any way whatsoever in reliance upon any material, information
or opinions provided by Alan Hull and his servants and/or agents.
I acknowledge that any future dealings I may undertake in any securities will be entered into freely and
voluntarily and without inducement or encouragement from Alan Hull and his servants and/or agents.

Please print all details clearly, tick where appropriate, sign, date and fax or post to
ActVest at 53 Grange Drive, Lysterfield, 3156. Phone-03 9513 0070 Fax-03 9778 7062

" Yes, I wish to subscribe to the Breakout Trading Newsletter. ($49.50 joining fee plus $49.50 per month)
Please charge to my Credit Card:
Card No. ___ ___ ___ ___

VISA

___ ___ ___ ___

"

MasterCard

___ ___ ___ ___

"

___ ___ ___ ___ EXPIRY ____ / ____

My full Name

____________________________________________________

Mailing address

____________________________________________________

E-mail address

____________________________________________________

Daytime Phone

____________________________________________________

Where did you

____________________________________________________

hear about us ?
Please sign here

(If applicable, please supply the name of the person who referred you)

x..... .......

DATED: