How to Spot a Failed Breakout
A breakout is a common type of trade that is easy to see, but a filed breakout can be harder to recognize. One type of failed breakout that is easy to see is the Day 2 Reversal. An example occurred on 12 September, after Ubiquiti (UBNT) appeared to successfully breakout.
Ubiquiti (UBNT) formed a 7-week cup pattern and traded in a tight range during the last 2 weeks before triggering a breakout above the $47.40 resistance level. The stock broke out on 2-times the average (50-day) volume; higher volume is an important requirement for valid breakouts.
The stock gained $3.32 (+4.81%) by the close on 11 September and showed range expansion, a constructive sign for a breakout. The initial stop loss was placed at $44.25. (see chart below)
On Day 2, UBNT recorded a new high, but then it quickly began to decline throughout the day in heavy selling volume. The stock fell -6.27% and closed below the low of the breakout bar, a key signal for a failed breakout. Above is a 15-minute chart of the breakout day and the reversal day. Defensive action was taken, and the stop loss was raised to just below the low of the reversal day at $45.90 (see chart above, blue line).
On day 3, UBNT opened above the stop loss price, but then price fell and stopped out the position with a small, -3.16% loss. UBNT continued to decline throughout the day, falling below the initial stop loss price, closing down -7.44% on the day.
It is important to take defensive action once there evidence of a failed breakout. Recognizing the failed UBNT breakout kept the loss on this trade small.
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