Trading Educators Blog
Is that Breakout Real?
How can you tell if the breakout from consolidation is real or not?
Trading rectangular block, i.e. ledges, or sideways chart patterns is a solid market trading approach so long as the breakout is not a false breakout.
A legitimate breakout should not retrace to 50% of the block pattern range, as the most profitable trades never retrace below the breakout price.
If the low of the daily breakout bar is broken on a closing basis, it was a false breakout and you need to exit the trade as soon as possible. A false breakout requires another breakout bar above the most recent high before a long entry — vice-versa for a short entry. Wait for a breakout to occur, then buy (sell) the next breakout of the first correction.
Many professional traders say that a breakout from consolidation is not real until you have a bar which is entirely clear of the consolidation area. That means every part of a price bar must no longer be in touch with any price in what were the consolidation parameters. If the breakout is to the downside, the high of the true breakout bar must be lower than the lowest bar of the consolidation. If the breakout is to the upside, the low of the true breakout bar must be higher than the highest high of the consolidation.
There may be other ways to define a breakout from consolidation, but the ones above are the ones I know and use.
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