Unlike most Support & Resistance traders, I prefer not to automatically enter on a breakout (although I won’t absolutely rule it out, such as when price bases before the breakout to allow a good low-risk position for a stop).

Instead, I watch the breakout for signs of one the following opportunities – a breakout failure trade or a breakout pullback trade. The following is an example of a breakout pullback, demonstrating the fact that sometimes, they come really fast.

In fact, on the trading timeframe below, the pullback is not even visible. It occurs within the breakout candle.

 

With a reasonably strong downside bias during this price action, I would expect a higher likelihood of continuation, than failure. Although I’d be prepared for both. Let’s look at the 1 min chart to fine-tune the entry.

 

 

Candle A shows the point of breakout, which included some buying pressure that pushed the close up to around the candle mid-point. Candle B shows the pullback continuing, as more bulls enter in anticipation of a breakout failure. In this case they were able to close higher, but the candle range was only small, as was volume. This shows a lack of commitment from the bulls.

A break back below the low of candle A will benefit from a surge of orderflow, as many of those who were trying to catch an early entry to a breakout failure were forced to exit their longs. Entry should be no later than this point of orderflow, where the losers realize they’ve got it wrong.

The opposite scenario (breakout failure) did not eventuate this time, but you should always be ready for it. It would have required the pullback at B continuing. At some point, the breakout traders would be covering their short position at a loss, adding to the bullish orderflow. The entry point for this scenario would have been the same – at or before the losing side realizes they’ve got it wrong.

Happy trading,

Lance Beggs

 


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3 Comments

  1. Hi mr.beggs
    thank you for your great articles
    i have a question that in fake break outs one of the signs of weakness is price stalls immediately after the s/r area so that we can conclude that probably we will have a fake break out in the other hand we have this quick pullbacks that price breaks a s/r area and stalls immediately then continue.
    is the only way to determine either of these by finding our trading time frame bias or there are another ways?
    thank you

  2. Hi mr.beggs
    thank you for your great articles
    i have a question that in fake break outs one of the signs of weakness is price stalls immediately after the s/r area so that we can conclude that probably we will have a fake break out in the other hand we have this quick pullbacks that price breaks a s/r area and stalls immediately then continue.
    is the only way to determine either of these by finding our trading time frame bias or there are another ways?
    i feel this question is naive sorry about your time.
    thank you

    1. Arman,

      It’s contextually dependent so I can’t give fixed rules here. Make a decision on how price acts as it breaks the level. Speed and ease of movement, degree of follow through etc. And of course, how this is influencing the mindset of those participating in the market at this area.

      Stalls post-breakout are great though. On those times when you have a clear directional bias, they can offer a great trigger point for entry. And if narrow-range, a tight stop location. But even when you don’t have a clear directional bias, sometimes these stall regions can act as somewhat of a “tipping point”, in that it’s clear that whichever way it breaks from here there could be sufficient orderflow to initiate either the breakout failure or continuation.

      So look at the actual context. And make a call based on what you see.

      Lance.

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