The Potential Breakout Failure PatternHi,
Sharing with you one of my favorite BO failure pattern.
What is this pattern?
It can be called as a topped out or bottomed out pattern. Which does not mean at all that the stock would start a major correction from this failure but only hints dying buyer interest. Many a times the stock see sharper pullbacks due to exits of the late bulls trapped in the BO spike. The most important part of the pattern is the price action after the BO candle. The pattern initiates with NO FOLLOW THROUGH of the breakout. That is, if after a tremendous volume breakout there is no follow up by the buyers -- a sharp reversal 'can be expected'.
As can be observed on the chart, candles A and B faced resistance at some price level and then in candle C there was a breakout with exceptionally higher volume. Normally this volume would be higher than several preceding intervals/candles and not just a few intervals as shown in this chart due to space constraint.
But then this BO is followed by inside candle/candles, showing that there is lesser buying interest and the price ultimately starts drifting down.
On which Time Frame (TF) this pattern is applicable?
The pattern can be observed on any TF from one minute to weekly, so its applicable on any TF. But one thing has to be kept in mind that one should trade this setup on the same TF in which it has been observed. Example, if this pattern is formed on Houly chart then wait for the price action to proceed on the hourly chart only. Lower TF entries are only preferred if the proper entry is missed for some reason.
Where should one enter?
Its a personal choice, depending upon the traders' personality. I would prefer to enter below the low of that killing higher volume BO candle, and I would need no second confirmation after that. In this case, If the BO candle low was below the BO level then it would be a higher probability pattern.
However, the Risk to Reward ratio should be considered first before entering. If the BO candle is very wide then either reduce position size or wait for smaller pullbacks after the price trade below the BO candle. In the latter case we may prefer to refine our entry through a lower TF chart.
Any profit objectives?
1:1 or 1:2 profit targets
An important support can also be a profit target.
Any Moving Average that one follows, 20 SMA may be.
If SMA is too near then some FIb. level can be a choice.
Is it a high probability setup?
Yes, for me it works. But nothing in this world is short of failures.
So trade and learn or you can also try the other way round..learn and trade.
Can it be used for both breakouts and breakdowns?
Absolutely.
I will try to put some examples..just..
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Trade safe, be healthy.
Regards
Bravetotrade.
