How do you determine a breakout from a false breakout?

[vladv]

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

[malvado xetra]

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]

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]

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]

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]

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

[Kiwi]

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.

[NihabaAshi]

	Quote:	Kiwi
	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]

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

[Humble1]

	Quote:	Kiwi
	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.