# False breakouts and stop loss placement



## pavilion103 (1 September 2011)

*FALSE BREAKOUTS*
I have just finished reading "The New Sell & Sell Short" by Alexander Elder. In this book he discusses that one of the most bullish signals is a false break to the downside accompanied by divergence (he uses the MACD and "Force Index"). Obviously the reverse is true for bearish signals. 

He said that most amateurs will automatically enter on a break above resistance and below support only to see it reverse on a false breakout. 

This has been one of the most difficult questions for me to answer as a beginner: when to buy on the initial breakout and when to wait for confirmation of a break. Obviously things like volume and divergence can help but I'm still very much trying to get a "feel" for this. 


*Stop Loss Placement*
Alexander Elder also discussed the placement of a stop loss around these market lows/highs. He says that amateurs place a stop 1 tick below the recent low. He said that there are very predictably many stops there and:
1. Slippage is an issue
2. There are very often false breakouts before price reverses again

So he says 1 tick below the low is not something professionals do. 


I don't have any particular question in this post but it would be good to open up a discussion on these points to see if they align with the views of Alexander Elder.


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## Gringotts Bank (1 September 2011)

Upwards breakouts work when:

1.  there's volume to support the move.
2.  The breakout occurs without too much waiting.  If the SP has to creep up onto the neckline/resistance, there's hesitancy and it will fail or be delayed. If it's a triangle type pattern, the break should occur 2/3 the way into the formation for best performance, not near it's end.
3. the Ords is bullish.

eg.  IRN I bought yesterday because of the absolutely perfect formation the inverse H&S.  It also matches what the Ords is doing in terms of it's pattern, which is bullish.  The break hasn't happened today.  Not enough volume.  Needs about 3 million shares traded to breakout convincingly.  I can take a loss now or bank on a delayed breakout late today or tomorrow.  Most of the boxes are ticked.  Ords gaining strength now.


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## MrMomentum (1 September 2011)

When it comes to upward breakouts I look for momentum.

Once an upward breakout occurs, I like to monitor the candles to see if they continue to make higher highs and higher lows.

If this does not happen I would be looking for any other signs to validate if the breakout is false.


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## motorway (1 September 2011)

A successful breakout needs signs of "resilience" in the price and "absorption" of volume
In the action preceding the breakout ...

Or it needs significant volume (= eg new participation driven by real news ) 
with no slippage in price 

imo

As most news is not news
the first criteria are usually the most relevant ( IE was there Accumulation ! )
such a breakout does not need Volume.

Though volume will come in as new participation follows along..

motorway


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## tech/a (1 September 2011)

The key is to spot a false breakout.
You see them all the time in futs.

Motorway has touched on some excellent points and I agree often volume and range in the direction of the breakout will often get you on the wrong side.

When I get some time I'll post up some charts explaining the way to identify these.

Het M/W good to see you back--- I'm still on v/d 5000 iu


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## barney (1 September 2011)

pavilion103 said:


> *FALSE BREAKOUTS*
> I have just finished reading "The New Sell & Sell Short" by Alexander Elder. In this book he discusses that one of the most bullish signals is a false break to the downside accompanied by divergence (he uses the MACD and "Force Index"). Obviously the reverse is true for bearish signals.
> 
> He said that most amateurs will automatically enter on a break above resistance and below support only to see it reverse on a false breakout.
> ...




Hi Pav,
Is Elder referring to Stocks in his commentary??  What he is saying seems more in tune with trading Forex and Futures.
Cheers.


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## tech/a (1 September 2011)

Barney I think the observations are true in all instruments.
Certainly pros keep away from swing high and lows for stops in futs.
But there are times when you can be pretty sure its as safe as houses.

I'm going to post up a chart and after people have had enough time to comment Ill post the next which is a follow on from the first then the next and the next all the same chart but at different stages.
Then Ill post my comments to each chart.
Will be interesting to see if people see .

The question for the chartist is is this a true or false break.
Through analysis present evidence to support your view.

I have included stochastic and volume only.


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## Chalea (1 September 2011)

tech/a said:


> The question for the chartist is is this a true or false break.
> Through analysis present evidence to support your view.


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## skc (1 September 2011)

tech/a said:


> Barney I think the observations are true in all instruments.
> Certainly pros keep away from swing high and lows for stops in futs.
> But there are times when you can be pretty sure its as safe as houses.
> 
> ...




Clearly it's a false break because if it was a real break with next candles going lower, the area of the chart where the candles are currently shown would be much higher relative to the y-axis.


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## tech/a (1 September 2011)

skc said:


> Clearly it's a false break because if it was a real break with next candles going lower, the area of the chart where the candles are currently shown would be much higher relative to the y-axis.




Don't see any candles?

The chart is dynamic .

Any other things you see to support a false breakout?


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## notting (1 September 2011)

I haven't got a clue but I'm going to try and learn something.
I'd say true because its not showing over sold stochastic, supported by high volume, finished on it's lo!w below support.
But I wouldn't trade it on that evidence alone.
Concerned about the high volumes on the preceding lifts.
Feels like a trick question.

PS I admire Chalea's willingness to have a crack!

PPS I have no idea what Chickie just meant!


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## tech/a (1 September 2011)

PS I admire Chalea's willingness to have a crack!


Who?


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## Chalea (1 September 2011)

notting said:


> PS I admire Chalea's willingness to have a crack!





tech/a said:


> Who?




LOL, bet I'm right!


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## barney (1 September 2011)

tech/a said:


> Barney I think the observations are true in all instruments.
> Certainly pros keep away from swing high and lows for stops in futs.
> But there are times when you can be pretty sure its as safe as houses.




Howdy Tech,   

No doubt the "push it past" support/and/or resistance, then reverse it, happens all the time in FX and Futs, but I think Stocks run a long last in the implementation of that strategy ..... thinly traded Specs are obviously more prone to it than Blue Chips due to their illiquid nature, which is paradoxical compared to FX where the amount of contracts changing hands is huge ......... as we know, the big players need large volume to create opportunity, and Stocks don't generally give that consistency. 

Interestingly enough, I see the above as an advantage for us retail traders if used in the right fashion ...... ie. Position sizing is critical in FX if you want to keep your shirt  .....   

If Elder was referring to Stocks behaving in the same way that FX and Futs do, I'd be a bit surprised, unless he was talking on longer relative time frames (for Stocks)

Its an interesting topic, and well worth the time invested to gain a sustainable edge.  (Still a work in progress for me, but getting some positive results)

Cheers.


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## skc (1 September 2011)

tech/a said:


> Don't see any candles?
> 
> The chart is dynamic .
> 
> Any other things you see to support a false breakout?




I thought you manually cut off the right-hand side of the chart to hide the next few bars, and I assumed that you didn't shift the bars vertically. So the lack of white space under the chart you posted indicates to me that there are no lower bars to the right.

It was just a joke really.

The only other thing supporting a false breakout is the purple line you've left in the chart which may suggest past support further to the left.

This is also a joke.


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## barney (1 September 2011)

tech/a said:


> View attachment 44299





Out of curiousity Tech ...

Is the Chart a Stock/FX or Futs chart?

Are the bars Daily/Hourly/ Minute  etc?

How does the Volume of the first high volume bar (a few bars in from the start of the chart) ... Compare to the highest volume bar of the previous day, and the day before that? 

ie. More information thank you


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## tech/a (1 September 2011)

barney said:


> Out of curiousity Tech ...
> 
> Is the Chart a Stock/FX or Futs chart?
> 
> ...




Futs
Yeh yeh more info coming
Charts are all follow on of he same chart.
One more in a mo
Then I'm off to bed 5.30 start


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## tech/a (1 September 2011)

Here is another to help with the analysis.----next bar actually and a little more white space below to help SKC


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## Lone Wolf (1 September 2011)

The chart looks more like being in a range to me, so I probably wouldn't normally try to analyze it. But I'd like to learn how so here goes:

Six bars prior to the break (red bar) - Sellers move price lower but buyers bring it right back up on the following bar. Price drifts down. Buyers step up and move prices higher but are met with sellers closing the bar near its low. The following bar is very low volume closing on the low indicating no further interest in trying to push prices higher. Looks good for a drop. However... Looking back further - the move down touching the first black line was on very high volume but had no follow through. Sellers are there but only want to sell at a good price, buyers happy to wait for a better price. Still seems like a range to me. 

The breakout bar itself closed on its low which is a good sign for a breakout, but I expect some of that high volume is from buyers coming in to pick up a bargain at the bottom of the range. If I wasn't already short I wouldn't get on now.
___________

I was a bit slow posting - now I can see the next bar. Doesn't change much for me.


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## AlterEgo (1 September 2011)

pavilion103 said:


> when to buy on the initial breakout and when to wait for confirmation of a break.




Just from my own observation, the best and most profitable trades were the ones that went very strongly in my favour straight away and never looked back, never giving me a second chance to enter. So if you missed the breakout or delayed and waited for conformation you'd have missed the trade.


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## notting (1 September 2011)

Volume was deminishing on it's subtle rise before the break down. 
Volume's up whilt trading below that recent short term rise so I'm still negative on that new inside bar even though it finished on it's high. 
Would like to see opening prices. 
Still not tradeable.


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## Mistagear (2 September 2011)

tech/a said:


> Here is another to help with the analysis.----next bar actually and a little more white space below to help SKC
> 
> View attachment 44305




Howdy,

I would normally like to see a little more background to assess where in the cycle this particular formation resides, however my read of the information supplied,
 The largest volume spike shows high demand met with supply which succeeded in pushing price below the initial upthrust.
A second drive higher through a sustained push (elevated vol levels)shows another occurrence of supply being the greater force and weakening the ability of bulls to drive higher.
From that point onwards (second highest blue volume ) volume spikes resulted in decline in price a sign that demand is weakening.
Next feature is the red volume spike where supply forced price back down to the horizontal support line, so supply now exists in numbers down to the support, a continuing weakening of demand.
Declining volume in the several bounce attempts shows demand almost exhausted, culminating in several extreme low volume days where demand appears almost non existent.
Supply returns having been unable to fill at the higher levels and price breaks down through support.
The second chart with the added bounce shows the attempted rally but given the backdrop of continued supply at lower and lower levels prior, my guess is trend continuation due to volume not supporting price, with a stop above the last no demand bar.

PS, unable to supply a visual overlay to mark tech's chart, apologies.


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## Chalea (2 September 2011)

tech/a said:


> Here is another to help with the analysis.----next bar actually and a little more white space below to help SKC
> 
> 
> 
> ...


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## tech/a (2 September 2011)

So some very good responses here and I agree background is very helpful.
On to the next chart a continuation of this chart a bit further along.

We can now clearly see this was a false breakout. (20 bars back)

Still a little more history was this a true or false breakout.
Remember with History sometimes we dont have the luxury of 1000s of bars data.
A lower time frame tick chart basically starts from the first bar of the day!
AND that's where a lot of the action takes place.
There are 3 more so wont place commentary until after.
Then we will have another go.


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## pavilion103 (2 September 2011)

Tech, I'm not sure if this has any relevant but I noticed that the close of the ultra high volume blue bar in the background is the same as the high of the very high volume wide-spread red down bar which started the current range. Does this mean that there is a lot of resistance in this area?

There was high volume in the 2 bars prior to the current one. Does this suggest some accumulation? With the current bar closing on the high it would suggest that most of the action the previous day was buying. Is this correct?
However, what scares me a little is that today's break is on below average volume. 

Just taking a stab at it!


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## Gringotts Bank (2 September 2011)

Gringotts Bank said:


> Upwards breakouts work when:
> 
> 1.  there's volume to support the move.
> 2.  The breakout occurs without too much waiting.  If the SP has to creep up onto the neckline/resistance, there's hesitancy and it will fail or be delayed. If it's a triangle type pattern, the break should occur 2/3 the way into the formation for best performance, not near it's end.
> ...




The moment my sell on IRN gets taken out at 37c, it appears immediately back on the scanner as a buy.  Still feel volume is a bit low so I won't re-enter.


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## craft (2 September 2011)

tech/a said:


> The question for the chartist is is this a true or false break.
> Through analysis present evidence to support your view.
> 
> I have included stochastic and volume only.
> ...





Can an Investor have a shot

I think both breakouts you refer to in the charts are true. They undeniably occurred.  If they were your signal to act then you should act and re-act to whatever follows  

The real question should be whether a straight price break signal is a good entry signal or should it be confirmed by another trigger (volume, divergence, the next bar whatever) .  I accept there are ‘failed’ patterns but your adopted trade entry signal/trigger can never be false. It may not work out, but that doesn’t imply it was false.  The distinction is critical. By all means try and find better performing signals outside the heat of battle but don’t let this interfere with obeying your signals when trading.  

It’s only after many occurrences that you can judge what a good or bad trade signal is. Looking at individual events and labelling them as false is to me potentially dangerous territory.  From what I have seen price breakouts never have had a high success rate but if you take ones that offer appropriate, close  stop levels you can manufacture high win/loss ratios to compensate. But I rarely trade anymore so maybe things have changed.


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## tech/a (2 September 2011)

Craft

Yes true but every trend starts with a breakout.
Anyway I'll leave the thread as there doesn't seem to be a great deal of interest.

Takes too long to stuff around with posting if I'm just doing it for the amusement of a few.

Have a good weekend.
FTSE is crapping nicely


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## Wysiwyg (2 September 2011)

craft said:


> From what I have seen price breakouts never have had a high success rate but if you take ones that offer appropriate, close  stop levels you can manufacture high win/loss ratios to compensate.



True from my day trading experiences too. One has to have the other breakout traders and day traders involved. You want a good number of bulls that are well endowed financially to be on the (long) breakout otherwise things can fizzle out quickly.


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## AlterEgo (2 September 2011)

Ok, I'll take a stab at the last graph. I'd say the breakout is *TRUE*. That resistance line has been very strongly defended in the past. Stock has hit it 11 times without being able to break through. This is the first day the stock has managed to penetrate it. Current bar volume is moderately high and closing on the high. Previous failed breakout downwards gives additional support to the upward breakout being true - stock doesn't appear to want to go downward, therefore path of least resistance is upwards.

However, these graphs are looking at it after the event. I mean, if you were trading the breakout, you'd already have a position on that breakout bar. I wouldn't be waiting for conformation as to whether the breakout was true  before entering, as it's often too late by then. So I'd be looking at those above graphs from the perspective that I already held a position in them and whether the current price action suggests that the breakout was false and therefore I should exit. In the above graph I see no reason to exit the trade at this point. Anyway, that's my take on it.


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## pavilion103 (2 September 2011)

tech/a said:


> Craft
> 
> Yes true but every trend starts with a breakout.
> Anyway I'll leave the thread as there doesn't seem to be a great deal of interest.
> ...




Can we get the answer for that last chart? I am very curious!


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## Wysiwyg (2 September 2011)

WTF is this stupidity then. The unemployment numbers in USA are subdued and the initial reaction on the FTSE is up for what reason f knows, followed by the true movement down. Can anyone tell me what happens here please??


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## skyQuake (3 September 2011)

Wysiwyg said:


> WTF is this stupidity then. The unemployment numbers in USA are subdued and the initial reaction on the FTSE is up for what reason f knows, followed by the true movement down. Can anyone tell me what happens here please??




Ftse/s&p/dax all same.

Its been happening recently where I think big funds are 'gaming' the market.

Its a well known fact that people will place buy stops above mkt and sell stops below market to catch the inevitable pop when the figures are released. Most orders are in a few minutes before the release.
Thus it is a simple matter of buying a few hundred S&Ps at mkt seconds before the release, and set off a chain reaction of buy stops which you promptly cover into. If the release is better than expected, stay out. If its worse than expected, feel free to short, as there are a bunch of people who just bought the high and are left very high and dry.


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## tech/a (3 September 2011)

SQ
Nice reply

The best thing any discretionary technical trader can do for their trading is learn how to read the right hand edge of a chart.

I was hoping in this exercise more would have a go --- some have and some good comments have come back.

To be able to look into a consolidation area and get on the right side of the inevitable breakout or to be able to read a move and know with a good degree of confidence that you should stay or leave a move is not only profitable but invaluable in all markets.


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## Wysiwyg (3 September 2011)

skyQuake said:


> Its a well known fact that people will place buy stops above mkt and sell stops below market to catch the inevitable pop when the figures are released. Most orders are in a few minutes before the release.




Yes that play also stops out shorts before resuming trend. I do know better.


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## tech/a (3 September 2011)

Wysiwyg said:


> Yes that play also stops out shorts before resuming trend. I do know better.




Was that last night?
I cant see it on a 1 min?


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## skyQuake (3 September 2011)

tech/a said:


> Was that last night?
> I cant see it on a 1 min?




On FTSE and S&P (1min charts see attached)


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## Mistagear (3 September 2011)

tech/a said:


> Was that last night?
> I cant see it on a 1 min?




The upthrust of 9.5points took 4 seconds and the down of 16points took 5 seconds.
I wonder how much slippage in that little lot. 

Cheers, M


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## tech/a (3 September 2011)

This is my 1 min chart




Data E signal.-- 23.30 Time


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## skyQuake (3 September 2011)

tech/a said:


> This is my 1 min chart
> 
> View attachment 44352
> 
> ...




Should be 10:30 tech, 11:30 is US open


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## Mistagear (5 September 2011)

tech/a said:


> SQ
> Nice reply
> 
> The best thing any discretionary technical trader can do for their trading is learn how to read the right hand edge of a chart.
> ...




Tech, 

Would really appreciate a critique of my analysis in my post #23 on this thread, from a VSA point of view.
Dont hold back on criticism, I dont have an ego with this and you can assist in my Wyckoff education.

Thnaks in advance, 
Regards, M


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## tech/a (5 September 2011)

Mistagear said:


> Howdy,
> 
> I would normally like to see a little more background to assess where in the cycle this particular formation resides, however my read of the information supplied,
> The largest volume spike shows high demand met with supply which succeeded in pushing price below the initial upthrust.
> ...




*Mistagear*

Given the information you have this is a fair attempt.

To attempt to show how I read a chart Ill put up the following for you to consider.
Remember this is a FUTS Chart 

 We need to look at support resistance areas shown with X
and price reaction when X is exceeded. Here Stops will be triggered BOTH buy and Sell stops.
So at the point where the lows are taken out sell stops belt along and price falls (At XX)but immediately price reverses with strong buying. This sets the scene for a great stop position.

Someone pointed out that price seemed to be ranging and I can only agree.
How can we know that price will breakout of the range up or down?

Take note of the blue highs and when the high was taken out volume would indicate that buy stops were triggered to cover shorts but supply was pretty average and price dropped due to lack of demand rather than a swamping of selling.

Notice the very low volume bar straight after xx very little volume and if there was supply then you would have seen a test toward the low--it never comes.

So as it comes to test the first resistance we look at that bars volume---its up but not massively so not many stops here--the next bar is all important so lets have a look.

How does that differ from the low at support?
So we would be long at a stop below the Low reversal and watching to see how this moves forward.

*DO WE STAY IN OR LEAVE and WHY?*

*Bottom chart is the first reference chart*


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## tech/a (5 September 2011)

Im currently trading the FTSE.

The chart is VERY similar.
You can see quite clearly where I went long (Well I hope you can) and I'm currently assessing the bars as they come up.
Im looking to see if this move will be sustained.
Any hints?


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## tech/a (5 September 2011)

A few bars here have influenced my trade what do you think I have done and why?
	

		
			
		

		
	




HINT
The *VERY LOW VOLUME BARS*


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## Mistagear (5 September 2011)

tech/a said:


> A few bars here have influenced my trade what do you think I have done and why?
> 
> 
> 
> ...




Tech, Thank you, appreciated.

I noticed the high vol fail attempt (first blue bar at 1854pm) similar to the upthrust 2009pm where supply again exceeded demand, 
2010pm slightly above av vol and no advance ( i would be out long at that close)
2015 extreme low vol suggesting mkt has no desire to push higher through the evident supply. Volume increasing and price now declining 2017pm
I'm short the break of 2013pm low with a stop above the 2017pm high.

Cheers, M


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## pavilion103 (6 September 2011)

tech/a said:


> A few bars here have influenced my trade what do you think I have done and why?
> 
> 
> 
> ...




The blue wide spread bar on high volume warns us that supply may be overcoming demand. 

There is no immediate increase in volume as price looks to fall, however. 

Price doens't seems to have the buying demand as it tries to rally. The last bar is interesting at price falls on high volume. 

I would wait and see if price is able to penetrate the lows of 20:00 and the highs of around 19:30. It will also be interesting to see if prices hold above the bar just before 20:15, forming a higher bottom. If it fails to penetrate this I would go long. 

How does this sound?


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## Mistagear (6 September 2011)

We need to look at support resistance areas shown with X
and price reaction when X is exceeded. Here Stops will be triggered BOTH buy and Sell stops.


Take note of the blue highs and when the high was taken out volume would indicate that buy stops were triggered to cover shorts but supply was pretty average and price dropped due to lack of demand rather than a swamping of selling.

Notice the very low volume bar straight after xx very little volume and if there was supply then you would have seen a test toward the low--it never comes.


Very insightful, I'm a little slow so needed time to digest the significance. You have added an element to the read which I had overlooked.
Again, Much appreciated.

Regards, M

PS, noticed I had incorrect minute in my reply last night, am guessing you had less reason to work out the trade than I did anyhow.


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## pavilion103 (26 October 2011)

Just having a read through this thread again. 
Are we able to see the outcome of this one or is it too difficult to dig up after all this time?

I'd love some more examples of false breaks if anyone has time.


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## pavilion103 (26 October 2011)

http://www.scribd.com/doc/51653097/Richard-Wyckoff-false-breakouts

I found this Wyckoff article interesting. "Buying Springs and Selling Upthrusts"

It describes three different types of springs and upthrusts.


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