Education

Traders' Inverse Relationship with Breakouts

Updated

⚡Retail traders often find themselves entangled in false breakouts or breakdowns. However, it's important to recognize that taking advantage of breakout opportunities isn't inherently flawed. The key lies in being mindful of the associated risks and never trading beyond what is considered an acceptable level of risk. By doing so, traders can protect themselves from unnecessary losses and navigate the market more wisely.

⚡Another crucial aspect of successful trading is planning for potential failures. While the solution seems simple – cutting losses and exiting the trade – it's essential to define what constitutes failure beforehand. Identifying these conditions before entering a trade allows traders to establish clear criteria for when it's time to step back and avoid further losses.

⚡To increase their chances of success with breakout trades, traders can consider adopting a strategy of trading pullbacks after a breakout has occurred. Typically, stocks pull back to retest their breakout levels, presenting attractive trading opportunities. While this approach can mitigate some failures, it's important to acknowledge that no trading strategy is foolproof. There may be instances where traders miss out on certain opportunities due to a lack of pullbacks, leading to feelings of "Fear of Missing Out" (FOMO). Remember, trading involves inherent uncertainties, and no strategy guarantees a 100% success rate.

⚡Lastly, traders should keep in mind that support levels offer potential buying opportunities, while resistance levels indicate potential selling opportunities. Being attentive to these key levels can assist traders in making informed decisions and improving their overall trading performance.

Regards
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Note

These breakout/breakdown levels offer huge liquidity- much required for filling huge orders of biggies, at market price, without pushing the market too much.

The reason being too much active orders sitting near those levels.
Anyone who bought would like to place their stop below a support level. Also break down traders would be waiting with their Stop orders to short sell as soon as the support breaks down. This leads to thousands of orders piling up in those areas.

As soon as the market breaks this support level, all these sell orders get triggered. If the trend is favorable, big investors / traders would like to absorb all this liquidity with their buy orders. Thus, there could be accumulation going on at the break of a support level where most retail traders throw their weapons. The opposite is true for the break of a resistance.

It's true that there are break failures and there are decisive breaks too that lead to continuation in the direction of break. It is traders' responsibility to understand the price action and volume activity at those occasions to differentiate between the two.

Bravetotrade

JJ Singh
Trader/Investor
Moderator, TradingView

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