Breakouts (continuation) versus False Breakouts (sweeps)

Price action is simple: trends end when continuation fails, then price attempts a reversal, and if that fails, the trend is neutralised and forms a balance range for consolidation. Our ability to distinguish between successful and failed continuation allows us to navigate price action on a risk informed basis and make a generous living.

Break outs are “successful continuation”, and reversals come from “failed continuation”. Failed continuation is a break out setup that fails the first backtest. The ability to define failed continuation allows us to exit positions for the right reasons. At the same time, we can use this principle to define risk and take trades into the opposite direction (reversals).

Anyone can master break outs and reversals. One simple fractal model leads the way, consistently across timeframes, and in a set of two instructions, I will take you through the basics.

If studied and executed correctly, the win rate is extremely high, and with proper risk and position management, this system is life changing.

This article introduces a set of abbreviations that are listed in alphabetical order in the Terminology section (opens in a new tab for quick reference).

Break Outs (Continuation)

Without exception, a break out sequence consists of an exhaustion pivot (local high), then a pullback and a bounce. We can call these the Setup High (exhaustion), the higher low and the sweep. Once these three parameters are met we have a setup. From there, we can start to look for the entry parameter.

The first bounce after the sweep is a scalp. It stops out early sellers. This push will exhaust and set a pre-break high. From that moment, price is going to prove if the break out is real: If the pre-break high is swept and price comes down to test the initial higher low and finds support, it tells us that continuation is initiating.

Price then has to make a higher high and a higher low to confirm that the break out is ‘real’, not ‘fake’.

Failed continuation is simply defined as a failed break out. There are fake break outs and failed break outs, and understanding the difference between the two is of paramount importance if you want to increase your win rate. The technical mechanics are always the same:

• price makes a push towards or through an old high, exhausts and comes back down;
• finds support and bounces to backtest the exhaustion pivot. This is called a ‘sweep’.

The sweep is key to continuation. Confusing the sweep with a break out stops you out in the vast majority of cases, and this lack of understanding is what makes people thing that more than 70% of break outs fail. They don’t. The sweep is the false break out, and in reality only really serves to show us if the exhaustion pivot holds more sellers or not. Buying this ‘look above’ is always a FOMO decision and rarely results in a successful trade.

Fig. 1 below details the Exhaustion Sequence along a trending EMA9.

An exhaustion sequence offers only one opportunity to buy: into the leading EMA9. This dip is always a failed breakdown on the timeframe below. Once the higher low confirms by price returning to the high for a lower high or a look above, we can define the setup and look for a break out to initiate.

The setup is defined between the exhaustion pivot and the higher low. Those become the setup high and the setup low, resistance and support.

Fig. 2 below details the technical setup.

For a break out to set up now, the sweep has to exhaust and price has to make a higher low towards the trending EMA9 or the setup low.

Fig. 3 demonstrates the higher low towards the trending EMA9.

The sweep exhaustion allows for an aggressive buy, called the EMA9 Push, labelled as 9BT for “EMA9 Backtest”.

The EMA9 Push leads to a ‘look above’ and constitutes a “false break out”. During strong uptrends, we can be aggressive and use this push for an immediate entry, but the stop always goes directly below the push candle, because when this push exhausts, the next higher low has to confirm the break out.

Fig. 4 below shows an aggressive long when price confirms a higher low after the sweep.

A 9BT doesn’t always make an immediate higher high. In fact, the simplest break outs to buy are when sellers try twice to trap hungry bears (Fig. 5), and price then comes back through the setup high and breaks out.

Fig. 5 below shows price taking out the 9BT low before giving the backtest long for an A+ break out.

Between fig. 4 and fig. 5 you can see that the 9BT, the ‘look above’ or the false break out are best scalped. The rule is that 9BT has to exhaust so that price can backtest the break out with a higher low and confirm the break out.

Even during strong uptrends, a good strategy is to trade the 9BT but take aggressive partials into that push, because the backtest fails, the break out fails.

The backtest fails when price takes out the last higher low before the higher high.

Fig. 6 below illustrates a failed break out.

Wedges and triangles

These principles govern all my work . Price discovery reveals levels, and it is up to us to decipher which waves are sweeps and which waves are attempts at trend.

To simplify this dynamic, we can use a set of diagonals that allow us to define parameters. These are the purple wedges you will typically see on my trade plan charts.

Fig. 7 below demonstrates how the EMA9 consolidation formed a contraction, highlighted by a wedge.

EMA9 BT and BT – Fractal Variations

The simple concept that laid out in this article allows us to define risk and understand where to place our stops. We can use this principle to navigate price and take high probability trades at locations we define with our higher timeframe trade plans. My examples above are of course simplified, using easiest setups. They don’t always set up the same way, and therefore, price action may get confusing, straying from the elementary setup definition, but not changing the parameters.

The challenge is to spot the higher high and then the higher low. Sometimes that is easy, but especially during strong momentum, they might hide themselves in what I like to call “momentum induced warps” – in technical terms just “running flats”.

• Without exception, the BT has to set up after the EMA9 BT exhausts;
• At all times, the HH/HL sets up the backtest entry – BT;
• The break out fails when the last higher low is taken out.

Fig. 8 below gives an overview of break out setup variations.

With these simple variations it should be clear that every break out has four potential attempts before it actually fails.

• First comes the higher low out of the sweep exhaustion (sellers trying once);
• There is the 9BT (buyers trying once);
• There is the 9BT push exhaust (sellers trying twice);
• Then the higher low has to give the BT (buyers trying twice).

The last step doesn’t always materialise, and it is this step that is crucial to a high probability trade. Buyers’ second attempt has to set up directly into the trending EMA9 and bounce. Without this step, there is no confirmation break out, and learning to recognise this step is key to avoid getting trapped.

Traps are what initiates reversals, the second edge of Barky’s Diagonal Entry Model.

Price Chart Examples

Applying these simple concepts to live charts can be a challenge, but with practise, it will allow you to define risk at pre-planned locations to decide and take a trade with conviction. Certainly some will fail, but the ones that work pay generously. At the same time, the ability to read price action this way also allows us to decide when existing positions may be at risk of failing – so we can trim or cut before taking a full loss.

Break outs are high probability when price is trending.

Another example demonstrates that ‘momentum induced warp’ that we call “Running Flats”. The concept remains the same. Price sweeps the exhaustion and comes back into the EMA9. The bounce gives the entry, and that entry confirms after a higher low (backtest) and a higher high (continuation).

Above, you see that all clouds are green and the 9/21 cloud is above the 34/50 cloud. Price is trending, and break outs are high probability.

When price is in a chop range, the EMA9 clouds are converging. The same setups become lower probability. Regardless, we just wait for parameters to be met, then take the trade. In the example below, all parameters were met, but the entry didn’t set up.

The rule is simple: initiate the break out, then test the EMA9 to confirm entry, and when it doesn’t backtest, there is no trade.

Failed Break Outs

If you understand the concept of a break out initiation, backtest and confirmation – as explained in this article – you also understand what has to happen for a break out to fail.

The stop always goes below the last higher low, because the break out fails there.

We can’t trade reversals out of ‘false break outs’, but we can trade reversals out of ‘failed break outs’, and these rejections hold the key to hourly, daily, even weekly swings. More about this in the next article in this series.

This concludes the Break Outs instruction. The next article in this series is Failed Break Outs.