Michael 1.

Parsons

False breakouts have an added force hidden within them. It is called limit
orders and they can be found sitting at predictable levels within a market,
especially just beyond breakouts. Traders who themselves are trying to
take advantage of a breakout trade as a market hits new levels will place
standing limit orders just beyond the breakout. As I mentioned earlier,
breakout trades are nothing new and used quite frequently by other methods
of trading. So as price hits these levels a flood of orders is activated. This
initially adds strength to the conclusion that a breakout is valid, so often
others will jump on board as well. But if this demand is not enough to
sustain the move then the market quickly returns back into its previous
zone. Now all these traders who had their limit orders activated have a
problem, they are sitting on the wrong side of the market and in a loss. So
many of them start to scramble to get out of the trade and this pushes the
market further away from the original breakout, fueling even more orders.
As fear picks up, the market is often pushed beyond any range that was
established and panic ensues, driving the market even further away.
So if you can correctly identify that a false breakout is occurring early
enough then you are in a prime position to make a very nice profit. The
key to this trade is to expect certain requirements to be met. Otherwise the
move will tend to be very weak. The main requirement boils down to
whether the breakout was a substantial one or not. There are two ways a
breakout will establish itself as significant before it occurs and if either
are present then it would certainly qualify for reversing positions when a
failure does happen.
Repeated attempts at breaking through a barrier would certainly qualify. This
is in essence what happens with a trading range. So a well defined trading
range where a failed breakout occurs is an example of a good candidate.
The second way would be when the market set a prior high or low and
significant time has passed before attempting to break it again. In this
instance, it is the time factor that makes it significant. It took a considerable
effort for the market to return to that same level again. Ifprice now breaks
this high or low but still fails to sustain it, the market will likely react by
moving in the opposite direction, just as it did before.
This second version can seem a little difficult to interpret. The question
that invariably arises here is; how much time is considered enough of
a time elapse between a prior high/low and the one that breaks it? The
answer is simply; enough time to 4e0stablish that any break is a serious