How do you determine a breakout from a false breakout?

[Blaze 10]

I would like to know how one can determine if the breakout is legit or false. I have been caught plenty of times buying a false breakout just to be stopped out seconds after my entry.

 

Is there a way to know before hand if the breakout will be valid? I would also like to know trading strategies to play breakouts.

 

Thank you

[Lisa 10]

I would like to know how one can determine if the breakout is legit or false. I have been caught plenty of times buying a false breakout just to be stopped out seconds after my entry.

 

Is there a way to know before hand if the breakout will be valid? I would also like to know trading strategies to play breakouts.

 

Thank you

 

You can try using Bollinger Bands. When they become narrow, there is a chance price will breakout in either direction.

 

Also the NR7 tactic. If the price range is minimum for the last 7 days, the breakout is likely to be real.

[fivedeez 10]

I would like to know how one can determine if the breakout is legit or false. I have been caught plenty of times buying a false breakout just to be stopped out seconds after my entry.

 

Is there a way to know before hand if the breakout will be valid? I would also like to know trading strategies to play breakouts.

 

Thank you

 

I had a similar problem playing breakouts so I stopped playing them. Try timing your entries on the pullbacks instead. It is a more conservative approach but less riskier.

 

Many time the low or high will be taken out by a few points just to reverse. I think alot of newbies will get caught in this move. They like to short new lows. However, you need to give it a little room (few ticks) to determine whether the breakout is valid or not.

 

Good luck

[Soultrader 12]

I will usually wait for a pullback when playing breakouts. Most of my breakouts are done around pivot points and value area. I do have one exception: I have found the TRIN range breakout to be one of the most powerful breakout setups.

 

Find the range of the TRIN during the morning session. If in the afternoon session the TRIN makes a new high or low, this can act as a leading signal for price to breakout. Remember the TRIN and price have a inverse relationship. If TRIN makes new highs, look to short price. If TRN makes new lows, look for a long setup. I find this setup to work particularily well in the late afternoon session.

[Bull run 10]

I will usually wait for a pullback when playing breakouts. Most of my breakouts are done around pivot points and value area. I do have one exception: I have found the TRIN range breakout to be one of the most powerful breakout setups.

 

Find the range of the TRIN during the morning session. If in the afternoon session the TRIN makes a new high or low, this can act as a leading signal for price to breakout. Remember the TRIN and price have a inverse relationship. If TRIN makes new highs, look to short price. If TRN makes new lows, look for a long setup. I find this setup to work particularily well in the late afternoon session.

 

Do you know if this strategy will work with equities as well? From my understanding you trade only futures?

[Soultrader 12]

I would say I trade 90% futures, 10% stocks.

 

I don't see why the TRIN breakout would not work for stocks. I suggest testing this out first. I use this strategy for futures only.

 

One similar strategy you can use for equities is TICK range breakouts. I know many stock traders who use this strategy. Anytime you have the TICK stuck in a 2 hour range, watch for new TICK highs or lows. The setup is to go with the TICK breakout.

[Bull run 10]

Interesting. I will try that out. Thank Soultrader.

[Soultrader 12]

Interesting. I will try that out. Thank Soultrader.

 

Your welcome

[Blaze 10]

Wow good stuff here. Lisa, what exactly is a NR7?

[Lisa 10]

Wow good stuff here. Lisa, what exactly is a NR7?

 

Here's the link for the trading terms.

 

http://www.traderslaboratory.com/forums/derivatives/83-trading-terms-tony-crabel-nr7-ws7-etc.html#post101

[vladv 10]

What exactly is NR7 tactic?Can I use it in forex market,as well?

[malvado xetra 10]

normally, when you enter into a breakout you are risking. Why? because you are buying expensive. so, buy cheap and sell expensive. wait for pullbacks, as easy at this. another point to value if a breakout is reliable or not is to watch volume bars. for example, if the volume bar is quite big at the time price is breaking out, it is possible that buyers are getting to the end of that trend and price is about to reversal.

[weiwei 10]

Vladv,

 

NR7 means narrowest range day for the pass 7 day. In trading this usually mean the next day has very good chance to be a big range day or trending day.

 

From my own experience, usually there may be a chance that the next day is also a NR7 day, but market will not stay in this contraction for long.

 

So if market end up with a NR7 day, then expect a bigger range day coming.

 

weiwei

[dalby 10]

fwiw, the futures have been a "means reversion" market for the last few years, which means (generally speaking) fading extremes is more profitable than playing breakouts.

 

imo, premarket research is very very helpful for this type of thing. i would never consider trading the YM without first doing my research as to NR7 etc.

 

today (monday) was an NR7 day btw.

 

we had a 43 point range today, which is 1/3 our 40 day average range of 128.

 

volatility is much more cyclical (and predictable) than price.

 

today was ALSO an inside day.

 

hint #1: NR7

hint #2: inside day

[weiwei 10]

Breakout play, I think it is relative term. what one must pay attention is the location of the breakout. Not all breakout are the same.

 

The one that I pay attention is the prvious swing high or low on daily chart or 135m chart. The longer the time frame, the harder it is to break out of it.

 

one can take the top down approach on the concept to know how real this breakout will be. But one thing to be aware is that the bigger the time frame of the Resistance to breakout, the harder it is to catch.

 

Bcause smart money will usually push through it fast and furiously, then take profit to scare off people from entry.(flag formation). And guess what, to hide their intention, they will do it 2 to 3 times to scare people away, thus create false breakout.

 

It is best for people to get in on pull back, so you can look for foot print on if market really want to go up.

 

Remember, market is design that only 10% will make money out of it. So market will have to carry the least amount of people up or down to be profitable. So false breakout is one way to achieve that purpose.

 

weiwei

[Humble1 10]

So how does one determine [objectively] when a breakout fails? I have not seen this answered yet.

[Kiwi 16]

Objectively a breakout fails if I have an entry signal and it hits the corresponding stops.

 

It may then be followed by another breakout which may or may not fail.

 

A breakout succeeds if I exit with a profit.

 

 

This is a traders answer not an analysts answer. Every trade is a combination of risk and reward.

[wrbtrader 10]

Objectively a breakout fails if I have an entry signal and it hits the corresponding stops.

 

It may then be followed by another breakout which may or may not fail.

 

A breakout succeeds if I exit with a profit.

 

This is a traders answer not an analysts answer. Every trade is a combination of risk and reward.

 

Hi Kiwi,

 

I like this answer a lot from a traders point of view.

 

Humble1: "So how does one determine [objectively] when a breakout fails? I have not seen this answered yet."

 

However, here's technical analysis point of view and one I seen elsewhere in another discussion.

 

A failed breakout occurs when prices retraces back through the breakout point, which can be different from one trader to another due to differences in the trade methodolgy, prior to the profit target being reached.

 

Its also possible for someone to trade the same breakout and designate it as a success while the other trader designates it as a failed breakout and that's why I like Kiwi's answer because it reflects what really happens most of the time.

 

For example, lets say two traders go Long when prices moves above a prior swing point of 547.00

 

One trader has a target of 2 point profit while the other is looking for 5 points.

 

Price then moves upwards and hits 550.00 with one trading exiting his position at 549.00 because he had a target of two points.

 

His stats will show the breakout was profitable but doesn't show if the breakout has failed.

 

Price then moves higher to 550.50 and then retraces back below the swing point of 547.00 to hit the stop of the other trader at 746.00

 

The stats of that particular trader will show the breakout resulted as a loss and has failed.

 

However, what if the price than quickly goes back up through that 547.00 swing point and reaches 560.00 and then continues higher into a trend development.

 

How do the stat guys categorize that breakout...

 

Did it fail or not?

 

Simply, via an actual trade point of view...a failed breakout can only be defined by profit or loss upon exiting the trade.

 

However, via a technical analysis point of view if it doesn't retrace for example a swing point breakout (there are different types of breakouts) that could be categorized as a breakout that didn't fail.

 

Yet, from a technical point of view...what about those breakouts that retrace a prior swing point and turn back around to go back through into the direction of the breakout.

 

I think the latter is what frustrates us traders the most.

 

My favorite type of breakouts are Volatility Breakouts but I won't go into it because it will take this thread into another direction (not on topic) and I can talk about this elsewhere here at Traderslaboratory.com if there's a discussion about such.

 

To answer the thread starter question...

 

Blaze: "I would like to know how one can determine if the breakout is legit or false. I have been caught plenty of times buying a false breakout just to be stopped out seconds after my entry."

 

One of the best ways to differenciate a breakout that is most likely (high probability) to fail as in to retest the breakout point...

 

Divergence.

 

Yet, although I like to trade one particular type of breakout...I still think its one of the toughest game in town.

 

Therefore, to be a successful breakout trader, you need to be able to recognize what causes them to fail and/or use a secondary strategy that involves fading breakouts.

 

Mark

(a.k.a. NihabaAshi) Japanese Candlestick term

 

"Volatility Analysis will open the door to consistent profits."

[walterw 10]

Nihaba : could you start a thread on this Volatility Breakouts, I am interested to hear what you have to say..... cheers Walter.

[Humble1 10]

Objectively a breakout fails if I have an entry signal and it hits the corresponding stops.

 

It may then be followed by another breakout which may or may not fail.

 

A breakout succeeds if I exit with a profit.

 

 

This is a traders answer not an analysts answer. Every trade is a combination of risk and reward.

 

This is good. Makes sense.

 

Most breakouts will only retrace 40 to 50% of the initial move, if they retrace at all. Other will form a high tight flag just above the breakout, and then move fast. Volume needs to expand slightly to confirm the breakout. It also pays to know where major support and resistance is before hand... gaps that have never been tested have a high odds of stopping breakouts.

 

Good stuff. thanks.

[walterw 10]

would love if you guys could post charts of this concepts, imagining this concepts on a virtual chart on my head just gets the entire concept dificult to understand... nice thread indeed,but poor graphic examples.... cheers Walter.

[torero 10]

This is good. Makes sense.

 

Most breakouts will only retrace 40 to 50% of the initial move, if they retrace at all. Other will form a high tight flag just above the breakout, and then move fast. Volume needs to expand slightly to confirm the breakout. It also pays to know where major support and resistance is before hand... gaps that have never been tested have a high odds of stopping breakouts.

 

Good stuff. thanks.

 

Humble1! Nice to have you on board. Insightful observation with concrete explanation as usual. Hope you can contribute more in the future!

[Humble1 10]

Humble1! Nice to have you on board. Insightful observation with concrete explanation as usual. Hope you can contribute more in the future!

 

I'll post some charts on this, but for now, last week, ER2 [R2K mini] failed an ascending triangle on the 60 minute chart. Something very definite happened right after the breakout to setup the bearish tone. See if any of you can pick it out.

 

[torero 10]

I thought the 825 was the measured from the double bottom.

 

 

If you mean the last gasp on late Friday on new high with low volume, I think I see it. It closed at resistance, 825, top of the old unfilled gap. I've noticed close at resistance is usually a selloff the next morning. Might just be my bias though.

 

[Humble1 10]

this is what I am talking about....yes, there are other patterns with targets yet to be reached.