How Breakout traders get trapped?
Updated
Underlying logic:
1. The market already gave 11% in the impulsive move and created a high. Obviously, the momentum was fading out.
2. If you recall my lecture on market structure, you already know that after the creation of a high, we must come down to create a new higher low. The market cannot keep making new highs without creating a higher low.
3. There was a Bearish divergence. The price was moving up and up but the RSI was creating an equal high indicating that there isn't enough buying pressure. (I have already covered this in my older posts)
Psychology and Behind the scenes stuff:
1. At the point of BO, there was only a round bottom, so nobody would have thought of it as the cup & handle pattern.
2. After the BO failed and the price dropped and formed the handle, the retailers thought of it as a cup and handle pattern. Only after the formation of the pattern, you would think of it as a pattern.
3. But the BO traders already got trapped at the top. You aren't aware of this if you don't have knowledge
4. So, in the end, nobody really paid attention to the manipulations done by the institutions. This is how retailers are trapped.
Warning candles: Doji + Hammers + Bearish candles indicating that there is a problem with the follow-up. Relatively good volume on hammer & doji, which is never a good sign for a breakout. It indicates significant selling pressure. A bullish breakout must always be accompanied by a good follow up, else it cannot sustain. Bullish BO needs good bullish candles, NOT dojis.
P.S: I am not saying the fakeouts can be avoided. But there are a few cases where fakeouts can be avoided. Also, this is NOT investment advice. This chart is meant for learning purposes only. Invest your capital at your own risk.
1. The market already gave 11% in the impulsive move and created a high. Obviously, the momentum was fading out.
2. If you recall my lecture on market structure, you already know that after the creation of a high, we must come down to create a new higher low. The market cannot keep making new highs without creating a higher low.
3. There was a Bearish divergence. The price was moving up and up but the RSI was creating an equal high indicating that there isn't enough buying pressure. (I have already covered this in my older posts)
Psychology and Behind the scenes stuff:
1. At the point of BO, there was only a round bottom, so nobody would have thought of it as the cup & handle pattern.
2. After the BO failed and the price dropped and formed the handle, the retailers thought of it as a cup and handle pattern. Only after the formation of the pattern, you would think of it as a pattern.
3. But the BO traders already got trapped at the top. You aren't aware of this if you don't have knowledge
4. So, in the end, nobody really paid attention to the manipulations done by the institutions. This is how retailers are trapped.
Warning candles: Doji + Hammers + Bearish candles indicating that there is a problem with the follow-up. Relatively good volume on hammer & doji, which is never a good sign for a breakout. It indicates significant selling pressure. A bullish breakout must always be accompanied by a good follow up, else it cannot sustain. Bullish BO needs good bullish candles, NOT dojis.
P.S: I am not saying the fakeouts can be avoided. But there are a few cases where fakeouts can be avoided. Also, this is NOT investment advice. This chart is meant for learning purposes only. Invest your capital at your own risk.
Note
The trap we discussed in this post, played out perfectly. When the stops got taken out, the market continued its original direction and now gave 8% gain.
Those who entered at the 1st BO got fooled and lost money. But those who entered at the pullback gained almost 8% in 2 days.
Obviously, it's a hard process to identify such cases. But if you manage to do so, you'll earn a good reward.
Rajat Kumar Singh,
B.Tech (Delhi Technological University)
Global Community Manager, TradingView
✅ Telegram: t.me/johntradingwick
✅ Blog: tradingwick.in/
✅ Amorella: amorella.in/
B.Tech (Delhi Technological University)
Global Community Manager, TradingView
✅ Telegram: t.me/johntradingwick
✅ Blog: tradingwick.in/
✅ Amorella: amorella.in/
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