In this post, we will discuss 3 very important market situations that every trader must be able to recognize: breakout, retest, and fakeout.
❗️ Please, note that the essential element of all these terms is structure: vertical and horizontal key levels.
📍 Breakout is a situation when the market breaks the identified horizontal support or resistance, or a vertical trend line.
Breakout is a very important event that signifies the willingness of buyers/sellers to violate the structures. Violation of support signifies a strong selling pressure, while a violation of resistance signifies a high buying momentum.
Usually, the structure breakout is confirmed with a candle close.
For confirmation of a breakout of support, a candle close below that is needed.
For confirmation of a breakout of resistance, a candle close above is required.
Take a look at a bearish breakout of a key support on Gold. After the breakout, the broken support turned into a resistance and was respected multiple times. It was broken by the buyers then and turned into a support again.
📍 Retest is the situation when the price returns to broken horizontal support or resistance, or a vertical trend line after a confirmed breakout.
For a structure breakout, high trading volumes are needed. Usually, after a breakout, the market participants are locally exhausted and a correctional movement follows. That may lead to a retest of a broken structure.
Most of the time, after a retest, a strong impulse follows. For that reason, for many traders, the retest is applied for trading entries.
Here is how nicely the price violated a key support on Gold. After a violation, the market became oversold and the price retested the broken structure.
📍 Fakeout or false breakout is the situation when the price has not enough strength to maintain its direction after a retest of a broken structure. Instead, the market returns below/above the broken resistance/support.
Above, is the example of a false breakout on EURUSD.
Fakeout is one of the main reasons why structure traders lose money.
One of the ways to avoid fakeout is to monitor trading volumes during a structure breakout. A volume spike is needed to confirm the strength of the market participants, while low volumes most of the time signify a manipulation.
Learn to spot breakouts and false ones, and try to trade on a retest.
Let me know what do you want to learn in the next post?