Chapter 5
Failed Breakouts, Breakout Pullbacks, and Breakout Tests
The sequence of breakout, failed breakout, either trend reversal or breakout pullback and then trend resumption is one of the most common aspects of price action, and most trades every day can be interpreted as some variation of this process. On a larger scale, it is the basis for a major trend reversal, which is discussed in book 3, where there is a trend line break and then a breakout pullback that tests the trend's extreme. The sequence occurs with all breakouts, but most often with a breakout of a bull or bear flag, which is a small trend in the opposite direction of the main trend on the screen.
Whenever there is a breakout, the market eventually pulls back and tests previous significant prices. The start of the pullback converts the breakout into a failure, and you should look at all breakouts as failing at this point, even if they subsequently resume. If the failure succeeds in reversing the trend, the breakout will have failed and the reversal will have succeeded. If the reversal only goes for a bar or two and the breakout resumes, the reversal attempt will simply become a pullback from the breakout (all failed breakouts that fail to reverse the market are breakout pullback setups for trades in the direction of the breakout). For example, if there is a bull breakout and then the market pulls back to around the entry price, forms a buy signal bar, and triggers the long, this pullback tested the breakout ...
