Failed Breakout/Breakdown Trade
In our last blog, we talked about a Breakout Trade Strategy, to capture momentum after a key level had been broken. Now, what happens if your breakout trades are not breaking out, but failing?
Over the last 12 months, the ES (S&P500) has been extremely choppy ping ponging between 4300 and 3800. Pure breakouts have been few and far between. If you are not familiar with the Breakout Trade Strategy, please review this blog https://www.futuresnetworks.com/post/breakout-trading-strategy
One way to counter this is to identify Failed Breakouts and Failed Breakdowns and how to trade them for profit. Most large runs (either long or short) will start with a failed break out or failed breakdown. For going long, a low is taken out (looks like a breakdown to the short side) stops are run and then the price reverses. These false breakdowns happen daily. Learning how to identify them takes practice but has become one of my key setups.
Here is diagram of the Failed Breakout and Failed Breakdown for a failed break out Long (sell below) and a failed Breakdown short (buy above)
The 2b reversal pattern (also called “spring pattern”) occurs when the price appears to be breaking out then suddenly bounces back in the opposite direction, forming a false breakout. Picture credit to Adam Mancini Substack @adammancini4
Another way to look at a failed breakout/breakdown is when prices moves through an identified level of support or resistance but does not have enough momentum to maintain its direction. This failed breakout signifies there is not enough buying support (in a long trade) or selling support (in a short trade) to keep pushing the price above or below the support level. There will be many traders getting into a position long (see breakout trade) thus, “trapping “ these traders for the failed break out short.
Last week was a prime example of a failed breakdown trade (FBD). The June 14th RTH low was set at 4399 (FOMC report) and was hit again at the overnight low on June 15th. Once this low was broken 90 minutes later (from a 8:30 ET CPI report) the support area seemed to have been broken, setting up an opportunity for a breakdown short.
Note, we were below the 89 and 200 moving averages, so the indicators were there for a short.
Traders piled in short, becoming trapped and subsequently the market ripped long for almost 100 pts during the RTH trading hours. Classic Failed Breakdown Trade!
I can look for the breakout or breakdown, but once my stop is hit (fails) then I can quickly switch directions. Typically I look to enter the trade 3-7 points above the failed breakdown (in this case 3-7 points above 4399).
Trading multiple contracts, I will get out of 75% of my contracts at my first target. In this case 4420 and leave my remaining contracts as a runner with a trailing stop that stays below the last lower high on a 15 min chart.
Trading breakouts and failed breakdowns takes practice. The first step is identifying areas of support and resistance. Knowing the Previous Day High/Low and Overnight High/Low is a great place to start.
Good luck and trade well!
Rob B
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