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Breakouts and fakeouts

How to tell in advance that a level is about to give way, and how to tell a strong reaction from a weak one. Here are the signs of an imminent breakout and why the speed of the approach matters more than the level itself.

Contents
  1. Shrinking time between touches
  2. Speed of approach to the level
  3. How to use it
  4. Common mistakes

In short

Breakout sign
The time between touches of a level shrinks: each new test comes faster.
Slow approach
Price crawls into the level, volatility fades, a range forms at the level — most likely a breakout.
Sharp approach
Price slams into the level and leaves just as fast — the level is being defended.
Exit rule
You entered at a level, there's no reaction and price "sticks" — better to exit early.

Shrinking time between touches

Every touch of a level eats some of the orders holding it. If price comes back faster and faster — after 40 candles, then 26, 14, 8 — pressure is building and there are fewer defenders. It's one of the most reliable signs that a breakout is close.

Time between touches shrinks — a breakout is nearresistance4026148breakout
The intervals between touches of resistance shrink — and the level breaks. Illustrative data.

The same works for sloped lines: if pullbacks to a trendline keep getting shorter, the line will break soon.

Speed of approach to the level

A reversal from a level should be sharp, especially if you're trading off a large limit order. A sharp approach and an equally sharp exit show that real volume sits at the level and absorbed all the pressure.

A sharp approach and a sharp exit — a strong reactionsupportlong
Price slammed into support and turned right away — the level is being defended. Illustrative data.

A slow move toward and away from a level gives traders too much time. When price stops at a level, volatility fades and the move turns into a range — all signs of a probable breakout.

A slow approach and a range at the level — the level won't holdsupportfadingbreakdown
Price crawled down to support, got stuck there in a narrow range — and broke through. Illustrative data.

How to use it

01
Count the touches
Shrinking intervals are a reason not to trade the bounce but to prepare for the breakout.
02
Watch the speed of approach
Sharp — a bounce is more likely; slow with fading volatility — a breakout is more likely.
03
Confirm the breakout
A close beyond the level and rising volume. A wick through it isn't a breakout yet.
04
Exit a weak trade
If you went long at a level and the reaction is weak, volatility drops and price consolidates at the level, close before the breakout.

A fakeout is a breakout without follow-through: price got beyond the level, found no new participants and came back. You can only tell by the return, which is why a breakout entry always needs a stop.

Common mistakes

Trading the fifth bounce in a row

The more often a level is tested, the closer the breakout.

Holding a long at a "stuck" support

No reaction is information too. A weak bounce more often ends in a breakdown.

Entering a breakout without a close

A wick through and back is the most common trap for breakout traders.

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