Home Technical Analysis Breakouts and false breakouts A Lesson from a Failed Breakout

A Lesson from a Failed Breakout

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In this article, we are going to demonstrate a recent breakout on EUROUSD which failed. The price was going down by obeying a down trending trend line. After finding a support level, the price produced a long bullish engulfing candle and made a breakout on the trend line. Buyers must have been waiting for a breakout like that to go long on the pair. However, things did not go as they could have. Have a look at the chart below how terrific that breakout was.

The H4 Breakout

Without any confusion, it is an explicit breakout. I would say it is a breakout that traders usually dream for. Since the breakout took place by a single candle, traders had to wait for a correction/consolidation of the price and then another breakout towards the upside to go long on the pair. Let us have a look at how the consolidation looked like.

The Consolidation

The price found resistance at the red marked horizontal level. The price consolidated here with some bearish candles. The bigger the range of consolidation the better it is. The range of the consolidation was not that big here though. Nevertheless, long traders started waiting for an upside breakout to take a long entry once the consolidation started taking place. Let us see how the breakout at the resistance level of the consolidation took place there.

Breakout after Consolidation

The breakout candle looks a strong bullish candle and this is an explicit breakout as well. However, look at red the arrowed candle which had been the last candle before the breakout took place. That candle is a bullish candle as far as the body of the candle was concerned. However, see the spike of it. It had a very strong rejection from the North. The breakout candle closed within its spike as well. This is what usually makes a lot of confusion among traders. The next candle after the breakout came out as a bullish candle too. However, let’s have a look at the chart what happened afterwards.

 

A Failed Attempt to Make Another Breakout

The price went towards the North for a while. Then, a bearish pin bar followed by a bearish engulfing candle made the price come down all the way where the trend started. The way the first candle was formed, it should have gone much further up. A question should be raised here is why it did not go that far even after a solid breakout like that. As we have discussed the last candle’s attribute before the breakout candle that suggested that to some extent buyers were not that confident. This is what made the candle have a long spike. This confusion/less confidence carried through and the price actually came down. This is what actually happened.

Things to Remember

  • At the very outset, if we get a single candle breakout, we must wait for consolidation.
  • We need to wait for another breakout which has to make the price come out from the consolidation zone.
  • Single candle breakout is the best breakout here (since this is not the beginning of the trend).
  • Breakout candle has to be a good-looking candle with a tiny spike.
  • There should not be any candle getting a strong rejection from the potential breakout level before the breakout candle.

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