Failed breakouts, also known as false breakouts or fakeouts, occur when price breaks through a support or resistance level but quickly reverses back. While frustrating for breakout traders, these failures create excellent trading opportunities for those who know how to recognize and trade them.
What is a Failed Breakout?
A failed breakout happens when price moves beyond a key technical level, triggering breakout traders to enter, but then reverses direction and moves back through the breakout point. The traders who bought the breakout are now trapped, and their forced exits add fuel to the reversal.
The opportunity: Failed breakouts trap traders on the wrong side of the market. Their panic exits create momentum in the opposite direction that you can profit from.
Why Breakouts Fail
Understanding why breakouts fail helps you anticipate and profit from them:
- Lack of volume: Breakouts without conviction often cannot sustain
- Stop hunting: Large players push price through levels to trigger stops before reversing
- Range-bound markets: Breakouts fail more often in sideways markets
- Counter-trend moves: Breakouts against the larger trend have lower success rates
- Overhead supply: Previous resistance levels create selling pressure
- Poor timing: Breakouts at the end of a move often fail
Types of Failed Breakouts
Different failure patterns offer varying trade setups:
The Bull Trap
Price breaks above resistance, drawing in buyers, then reverses sharply lower. Buyers are trapped with losses, and their exits accelerate the decline.
The Bear Trap
Price breaks below support, triggering shorts, then reverses sharply higher. Short sellers are squeezed, adding to the upside momentum.
The Spring
A Wyckoff pattern where price briefly dips below support, shakes out weak holders, then reverses higher with strength.
The Upthrust
The opposite of a spring - price briefly pokes above resistance before reversing lower.
Bull Trap Trade Example
Stock ABC breaks above $50 resistance that has held for weeks:
- Breakout: Price moves to $51.50 on moderate volume
- Warning signs: Volume below average, price quickly stalls
- Failure: Price falls back below $50 within 2 hours
- Entry: Short at $49.80 when price confirms below $50
- Stop: $51 above the failed breakout high
- Target: $47 at the bottom of the prior range
How to Identify Failed Breakouts Early
The key to trading failed breakouts is recognizing them before the reversal completes:
Volume Analysis
- True breakouts show expanding volume; failures show weak volume
- If volume does not confirm, be suspicious of the breakout
- High volume on the reversal back through the level confirms failure
Price Action Clues
- Long upper wicks on the breakout candle suggest rejection
- Quick reversal within minutes or hours is a warning sign
- Failure to make new highs after the initial breakout
Time Analysis
- Valid breakouts usually show follow-through within the same session
- Breakouts that stall immediately after triggering are suspect
- Next-day gap downs after breakouts often signal failure
The confirmation rule: Wait for price to move back through the breakout level before entering the failed breakout trade. This confirms the failure and reduces the chance of getting caught in a shakeout.
Setting Up Failed Breakout Trades
A systematic approach to trading failed breakouts:
- Identify the breakout level: Note where resistance or support is
- Watch the initial breakout: Look for warning signs (low volume, rejection wicks)
- Wait for confirmation: Let price fall back through the breakout level
- Enter on confirmation: Go short (bull trap) or long (bear trap)
- Set stop above/below the failed breakout: Protect against the breakout resuming
- Target the opposite side of the range: Failed breakouts often run to the other extreme
Bear Trap Trade Example
Stock XYZ breaks below $30 support:
- Setup: $30 has been tested as support 4 times
- Breakdown: Price drops to $29.20 on light volume
- Warning: Selling dries up quickly, no follow-through
- Failure signal: Price reclaims $30 with strong buying
- Entry: Buy at $30.30 on the reclaim
- Stop: $29 below the failed breakdown low
- Target: $33 at prior resistance
Risk Management for Failed Breakout Trades
Failed breakout trades have defined risk when structured properly:
- Stop placement: Always place stops beyond the failed breakout extreme
- Position sizing: Calculate shares based on distance to stop
- Time stops: If the trade does not work within a session or two, reconsider
- Partial profits: Take some profit at the middle of the range
Best Market Conditions for Failed Breakout Trading
Failed breakouts are more common and reliable in certain conditions:
- Range-bound markets: When the market lacks trend, breakouts fail frequently
- Late in trends: Breakouts at the end of extended moves often fail
- Against the trend: Breakouts against the larger timeframe trend fail more often
- Choppy markets: Low conviction markets produce more failures
- After news fades: News-driven breakouts that lose momentum
Intraday Failed Breakout Tactics
Day traders can apply failed breakout concepts on shorter timeframes:
- Opening range failures: Trade failures of the first 15-30 minute range
- VWAP rejections: Fade moves that fail to hold above or below VWAP
- HOD/LOD fakeouts: Trade reversals when new highs or lows fail to hold
- Pre-market level failures: Trade failures of pre-market high and low
Track Your Breakout and Failure Trades
Pro Trader Dashboard helps you analyze which breakout setups succeed and which fail, improving your ability to distinguish between the two.
Common Mistakes in Failed Breakout Trading
Avoid these errors when trading failed breakouts:
- Anticipating failure: Wait for confirmation, do not fade valid breakouts
- Fighting strong momentum: Sometimes breakouts do work; respect the trend
- No stop loss: Failed breakout trades need stops in case you are wrong
- Oversizing: Start small and add only when the trade confirms
- Ignoring timeframes: A failed breakout on 5-min might succeed on daily
Combining with Other Strategies
Failed breakout trading works well alongside other approaches:
- Support/resistance trading: Failed breakouts confirm levels are holding
- Mean reversion: Failed breakouts signal a return to range
- Trend following: Use failed counter-trend breakouts as trend entries
Summary
Failed breakouts offer excellent trading opportunities by trapping traders on the wrong side. The key is identifying failures early through volume analysis, price action, and time confirmation. Wait for price to move back through the breakout level before entering, set stops beyond the failed breakout extreme, and target the opposite side of the trading range. Failed breakouts are most common in range-bound markets and against the larger trend. With proper identification and risk management, these setups can become a reliable part of your trading arsenal.