Price action traders consider the breakout as one of the most important factors. It is, once it is confirmed. However, momentum, overall psychology are essential aspects of breakout that less experienced traders often misapprehend. In this lesson, we are going to demonstrate an example of a breakout with less momentum. Let us get started.
The chart shows that the price is up trending with good buying pressure. The price makes a breakout at the last swing. This is an ideal chart for the buyers to look for buying opportunities. They are to buy the pair on the pullback. Let us proceed to the next scene.
The price starts having a correction and comes back up to the breakout level (the last swing high). It produces an engulfing candle, which is a strong sign that it may keep going towards the upside, makes a breakout, and offers a long entry.
The price does not find a strong buying momentum. It goes towards the upside and comes back again to the support. It seems the buyers may have to wait longer than they thought.
Things look a bit different now. Rather than making an upside breakout, it has a strong rejection at the resistance. The support is being tested again.
No downside breakout, but the support holds the price. The price gets caught within two horizontal levels. To be precise, the price gets caught within a rectangle. Ideally, both the sellers and the buyers love to keep this chart in their watch list; get a breakout at either side to take an entry.
Two consecutive bullish candles right at the support suggest that the buyers have the upper hand. The buying momentum looks good here. If it continues going towards the upside and makes a breakout, the buyers may dominate here. Let us see what happens next.
Oh no, the price heads towards the North with less buying pressure. The bullish move has much less speed than the last bearish move. This sort of price action usually makes the price have another bearish move and head towards the support. Let us find out what happens next.
An upside breakout this is! After the breakout, if the price consolidates and makes another bullish move from the breakout level, it would be a buying market again. However, the question is whether it makes the buyers interested in buying or not.
- The last bullish wave does not have the drive.
- The resistance level is strong
Let us find out what happens next.
It does not produce a bullish reversal after the breakout. Instead, it comes back in. The breakout is not valid anymore. What may have been a strong buying market has become a choppy market again.
The Bottom Line
The breakout may have offered us entry if it produces a bullish reversal candle at the breakout level. That does not happen. We cannot precisely tell why that happens here. However, the less momentum to begin the potential trend is one of the reasons among many. It represents that psychologically, the buyers are not confident about the breakout and continuation, which makes that a nullified breakout in the end.