|
Quote: |
|
 |
|
|
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."