Buy Second Failed Breakout

It is said that the herd is usually wrong. Professionals look for amateur mistakes to make their money. Of course, there’s more to it than that, but here goes…

People can be very predictable. There can be obvious places to put your stop. The pros know this.

Thinking like a pro is difficult. It involves, in many cases, doing the opposite of what you would be thinking in an amateur mindset. Don’t belive me at how tough it is? Go into a demo account and when you’re ready to buy something, hit “sell.” Ready to short something? Hit “buy.” You never know, you might even end up with better results, haha.  Seriously, though, if you do try it as an experiment, you can see how difficult this is to do the opposite.

But the lesson is bigger than that. If something seems obvious, it may not happen that way.

One example is this failed breakout:

 The price broke to the upside but didn’t stay too long.

Someone who would have bought this breakout would often keep their stop below the channel. This is also where (and we’ve all done this), many would reverse their position… They would exit the long trade at a loss and now enter a short trade.

In this case, it would have been the optimal point to buy. The target could have been a number of things… the start of the downward channel as a simple one would have worked in this care.

Advantages:

This type of trade could have huge targets compared to the risk.

Disadvantages:

Of course, the price, after it failed to go up, could have continued to go down. Or it could have gone down a bit more, stopped out and then gone up. The problem in this case is that the stop is arbitrary. In this case, the price just dropped a couple of pips below the line. Would need to find a specific amount (ie. 10 pips a 5 min. chart, more for longer term charts). Need to test.

Variation:

Another idea would have been to short when the price re-entered the channel after the failed breakout to the upside and target the lower end of the channel. In this case, would have worked perfectly (and quickly). Have to test if this usually happens though.

One thing I did notice in this case is that, even though the price has dropped quite a bit (in that long channel), when the first breakout occured, it wasn’t oversold. When I checked RSI and Stochastic afterwards, noticed it had very slight divergence. However, after it failed and dropped, that buy point at the second failed breakout had pretty strong Stochastic divergence (not as strong on the RSI though). Of course, this is done with the benefit of hindsight… But it can always be useful to look at why a trade didn’t work to understand what may have been missed.

Would need to see how often the failed breakouts fail a second time. But the concept behind it is interesting… Thinking like a pro… and trying to figure in advance where the orders are likely to be.

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