Failed breakouts

A breakout trader can get very frustrated when caught in price movements that can eventually be described as corrective. I have always found it difficult to trade corrective price structures (and V reversals). I have modified my style to try and get in earlier, before the obvious breakout, so that I am in profit (or BE) if the breakout fails.

IMO failed breakouts have the potential to be traded profitably. A failed breakout of a pivot low presents a signal to go long and a failed breakout of a pivot high presents a signal to short.

My source for the idea came from Trader Vic II, Principles of Professional Speculation. It evolved from his 2B rule. I am posting the idea to stimulate discussion and I am not currently using it.

Interested backtester's would have to first identify non trending price action and I would suggest looking at the pivots that are outside the bollinger bands first. Many of the entries are intraday which would be a challenge to backtest.

I have included a chart of GNS which has many good examples of this idea.

Yes, failed breakouts can be great to trade, just a few comments on them.

If the previous high had high volume, it could mean distribution, be careful of tests of a new high breakout with low volume.

Further, many breakouts retrace to form a consolidation around their old highs, so while the consolidation pattern could form below the resistance (support) of the previous high, it may not mean a reverse should be traded.

One more point, that chart you posted is messy, jumpy price action and most of the breakouts you point out are not really traditional patterns or test of new highs (lows), in this chart situation and in many, taking a position at close can help eliminate false breakouts where the 'smart money' tries to sucker in the retail traders so they can distribute. Also called a 'test'.

Cheers

Turtle Soup

MRC & Co said:

taking a position at close can help eliminate false breakouts where the 'smart money' tries to sucker in the retail traders so they can distribute. Also called a 'test'.

Click to expand...

OR, trigger stops.

The distribution scenario is generally seen as a hammer or shooting star and can signal a top or bottom.

Turtle soup is the epitome of that chart.

The candle to the left of the last tick on the chart where volume also enters into the equation and a hammer is seen is the best trading opportunity from my perspective. Going long of course.

If it is a break what is it breaking?

Splitting hairs or in this case noise, how many genuine trades would we like?

Long or short or noise. A failure one way could well be a failure the other way. Noise at its best.

Here's a current trade of mine.

Went short @ $6.45 at close on Monday on the upthrust bar. Original stop at the red line, current stop at pink line, pretty much a B/E trade now barring slippage. But until support at $5.95 - $6.00 is broken might turn into a nothing trade. Intial target is $5.60 - $5.80.

A couple of things I look for in this type of set up is.

- An upthrust or spring through resistance/support
- Trading with the main trend, or if in a trading range price at the top/bottom of the range.

It's Snake Pliskin said:

If it is a break what is it breaking?

Splitting hairs or in this case noise, how many genuine trades would we like?

Long or short or noise. A failure one way could well be a failure the other way. Noise at its best.

Click to expand...

I agree with Snake here.

Hardly a discussion on breakouts more V reversals.

Nomore4s has posted a classic breakout failure.