In today's video, we explore an interesting case study on the lateral consolidation pattern, a pattern inspired by the Darvas box system, and applied by me over several decades. In fact, I've been invited to the 2027 US Investing Championship, where I will apply this exact strategy. It is a strategy that can be traded almost entirely passively, requiring just a few minutes of attention each weekend. To give some insights into my approach, I studied the top 100 performers of the past 5 years to find out how many tradeable lateral consolidation patterns emerged.

And the results are equally as encouraging. For those who are new to the channel, I trade these lateral consolidation breakouts passively on weekly charts using our bespoke breakout scanner. It scans thousands of stock charts and automatically identifies potential setups, saving me from a tremendous amount of manual effort, and giving me a focused list for final selection. From there, all I need to do is apply my remaining criteria, and select the best candidate to trade.

The strategy is particularly useful for busy individuals because it can deliver solid results with minimal time and effort. The strategy buys stocks when they break out, and successfully sustain their price on a weekly basis. Importantly, our entries are made at the open of the week following confirmation of the breakout week. What makes the breakout scanner such a powerful hack is that users can design what the consolidation box should look like.

By adjusting certain parameters, you can choose length and depth of consolidation, strength of breakout, and volume, etc. It can also be used on daily charts, too, for those willing to spend more time in front of the PC. For those interested in the strategy and the scanning tool, you can use the links in the description below. Now, lateral consolidation patterns have certain non-negotiable characteristics. So, before we look at the results from the study, let's establish the rules.

First, we look for market momentum as a whole. We want the market to be in bullish territory before applying the strategy. I use the S&P 500 as the benchmark. Open the weekly chart for the S&P index and select the 10 and 20-week EMAs, the exponential moving averages. We only apply the strategy if the 10 EMA is above the 20 EMA, and if it's not, we stay in cash. After assessing the market trend, we move to finding breakouts.

I use weekly charts and find stocks that are trading above the 20-week moving average. This ensures we are in an upward trend with the tide behind us. Next, we want to see some price consolidation. At least 6 weeks is required, and longer is often better. We also want to visualize more near-term momentum, displayed through the MACD indicator. We always want to be in a position with the MACD line above the signal line.

Next, the consolidation channel or box is determined by the occurrence of candles touching or closing at a near parallel point. The upper line is the resistance, and the lower line is the support in the pattern. The catalyst for entry from a technical standpoint is confirmed when price breaks through the upper resistance line and closes. The entry would be at the open of the following week, a nominal amount above the closing price of the breakout candle.

It's also important to note that if the upper weekly candle wick is greater than 50%, we do not take the trade. This can indicate significant selling pressure, and we want to be with momentum, not against it. Therefore, the fuller the candle body and the shorter the upper wick, the better. Other entry criteria that need to be satisfied are the breakout candle should be at least a 10-week high, measured by closing prices.

The breakout candle should be greater than 5% and less than 20% of the previous week's closing price. The consolidation structure must allow for a sensible stop loss, percentage-wise. For exits, we have two criteria. An initial hard stop, and secondly, a raised stop. The initial hard stop is determined by the consolidation channel. We always split the consolidation box into three portions, upper, middle, and lower. The upper and lower portions are ignored.

The upper is too early, and the lower is too late. The middle portion is where we place the stop, usually the lower end of that portion. If the structure does not allow for a stop loss of less than 20%, we do not take the trade. As a rule of thumb, my average stop loss is 10%, but in times when I get close to 20% stop loss trades, I would reduce the position size to compensate. For raised stops on positions, we monitor the MACD on the weekly chart looking for the cross down of the blue MACD line over the red signal line.

The trigger for raising the stop loss position is when the MACD crosses down and closes underneath the signal line at the end of the week. We then raise the stop position underneath the wick of that closing weekly candle. Coming to the study, I checked the top performers for lateral consolidation patterns using the exact same rules I follow in my trading. In total, I found 57 clean lateral consolidation setups among the charts of the top 100 stock market performers over the past 5 years.

Of course, there were far more setups in total, but this study was based on only the top 100 stocks. The average risk on the trades was 12%, while the average return was 106%. That's about a 9x risk to reward ratio. The number is high because the study has been done in hindsight, and therefore has a win rate close to 95%. My own data from real trading puts this number at 3.25x with a win rate of about 50%. That is the kind of positive expectancy you must aim for in trading.

Let's get to some examples from the study. Here is TSMC's charts from August 2025. The stock formed this small lateral consolidation on a weekly basis with this solid breakout. Our scanner would have picked this on the weekend scan automatically. The entry would have happened at the open of the next week, just pennies above the close of the breakout week. In this case, it would have happened near $54.80. The stop loss would have been placed at the middle of the box at $47.50, a 13% stop loss.

The stock kept marching up for several weeks afterwards. Some loss of momentum happened here when the blue MACD line closed below the red signal line. As the stock passed the low of the crossover week, the position would have been squared off at a 117% gain, a 9x risk to reward. Here is VST's charts from October 2023. This breakout from lateral consolidation ticked all boxes. Six weeks of consolidation, a solid breakout candle that closed up a strong 9% from the previous week's close, and a positive MACD.

The entry would have happened near $34.20 with the stop loss near $31.50. 8% from the entry. The stock continued to post weekly advances and finally started losing momentum here when the MACD line closed below the signal line. The exit rules would have triggered here when the stock went below this low. From the entry point, this was a 140% return. A 17x risk reward. Here is one more, Nvidia from January 2024. This was a small lateral consolidation lasting 6 weeks.

It broke out here with a positive MACD and an 11% breakout candle. The entry would have happened here with a 13% stop loss to the middle of the pattern. It saw a negative MACD crossover here first, but the stock did not cross below the crossover week low. So, the raised stop wasn't triggered. The MACD again saw a negative crossover here in July 2024, and the stock was raised to the low of this candle at $106. This was subsequently breached here.

This trade would have been closed at a 93% profit, a 700% return on risk. Here is the list of all breakouts with the month and year of breakout along with the risk and reward on those trades following my strategy. It is important to keep in mind that this study is subject to survivorship bias. There would inevitably have been many losers along the way, but the key is to keep losses small when they occur while allowing winners to run.

This creates what is known as an asymmetric return profile. Managing each trade in this way provides the foundation for positive expectancy over time. In the links below, you'll also find our free trading simulator, which provides an indication of potential trading returns based on a range of inputs. This can be a powerful tool for those entering the trading world as having realistic expectations from the outset can help you stick with your approach long enough for the law of large numbers to take effect.

If you are interested in the approach, want to check out the scanner, become a part of a like-minded community following this approach, or simply want to see my trades in the upcoming championships, check out the links below. If you want to find out more about the principles of the Darvas consolidation box method, you can click this video. As always, thanks for watching.