Lesson 6

Capitulation Strategy
Counter Trend Trading System

By Adam Khoo

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
 The Capitulation
A short term counter trend trading strategy that seeks to buy stocks and ETFs that
are oversold on long term and short term time frames and in which there is a
probability of a short term counter- reaction to the upside. This should only be
executed in the context of index being highly bullish (i.e. S&P 500 above 20EMA)
In this strategy, we want to buy a stock/ETF when anyone who could have been
convinced to sell have already sold, so that only those interested in buying are left.
We want to see a price action that indicates a reversal is underway before entering.

Long
Capitulate
 Capitulation Price Action

The One White Soldier Confirmation

A White One Solider Pattern Consists of a Bearish Candle followed by
a Bullish Candle

Bullish candle 2 must open above the close of the Bearish candle 1 and
make a higher low
Bullish Candle 2 must close above the open and the high of Bearish
candle 1

1
Capitulation: Chart Setup

20EMA

50MA

Williams% R
(10)

Williams% R
(260)
Entry Rules
The Capitulation
• S&P 500 Index must be above 20EMA
• Price declines rapidly and makes a new low (6 month low) after a steep sell-off
• Williams %R (10) < -80 (Short Term Oversold): Short term sellers sold
• Williams %R (260) < -80 (long Term Oversold): Long term sellers sold
• A One White Soldier Confirmation Candle appears
• Bearish Candle 1 (swing low) is followed by a bullish candle 2 (confirmation) 2
• Bullish candle must open above the close of Bearish candle and make a higher low
• Bullish candle must close above the open and the high of bearish candle
1
Confirmation
Swing
Low

Confirmation Candle (2)

Swing Low Candle (1)

W(10) < -80

W(260) < -80

 The Capitulation
Placing Orders
• Entry: Buy stop limit order 1-10 cents above confirmation candle 2
• Stop Loss: Sell stop order 1-10 cents below swing low candle 1
• The Distance between Entry and stop loss is 1R. There should be at least a 1R distance to the 20EMA
• Target price: Sell Limit placed 2R above entry price
• The target price should be below the 50MA

Trade Management & Exit Rules

• Shift the stop loss order to the entry price once price moves 1R in your favour and/or hits the 20EMA
• Subsequently, allow the price to hit your stop loss order (0R or -1R) or your Profit target (+2R)

Sell Limit GTC

2R

Buy Stop Limit

1R
Sell Stop GTC
Candle 1 Candle 2
Bearish swing low Confirmation candle
The Capitulation

2R
entry
1R
stop loss

Candle 1
Candle 2
Bearish
One White Soldier

W(10) < -80

W(260) < -80

The Capitulation

Target
2R
entry
1R
stop loss

Candle 1
Candle 2
Bearish
One White Soldier

W(10) < -80

W(260) < -80

 High Probability Capitulation Trades

The highest probability Capitulation trades happen when….

a) A previous low (and stops placed below) are ‘taken out’ by a

new low from the swing low of the ‘One White Soldier’. The bullish
candle of the OWS should close above the previous low

b) or…. when 5 or more bearish candles (lower highs and lower

lows) preceded the OWS.
A previous low (and stops placed below)
are ‘taken out’ by a new low from the
swing low of the ‘One White Soldier’.
The bullish candle of the OWS should
close above the previous low
 5 Red Candles
Lower highs, lower lows
 5 Red Candles
Lower highs, lower lows
 5 Red Candles
Lower highs, lower lows
 5 Red Candles
Lower highs, lower lows
 5 Red Candles
Lower highs, lower lows
 Lesson 6
Capitulation Strategy
Counter Trend Trading System

By Adam Khoo

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017