In order to trade in a reverse breakout, you need to know where a potential reverse breakout will occur.
Potential false breakouts are usually seen at support or resistance levels formed by trend lines, technical patterns or previous highs or lows.
In reverse breakout trading, we need to always remember that there should be some space between the trend line and the price.
If there is a gap between the trend line and the price, it means that the price has gone a bit along the current trend and is far from the trend line. As shown in the figure below, there is space between the price and the trend line, which prompts the price to subsequently retreat towards the trend line target, or even fall below the trend line support, which provides a very good opportunity for a reverse breakthrough.
The speed of price movement is also very important
If the price moves like a caterpillar towards the trend line, a false breakout is likely to occur. However, the rapid movement of the price along the trend line may prove the effectiveness of the breakthrough. Because of the rapid price movement, kinetic energy can prompt prices to quickly break through the trend line. In this case, it is best not to try a reverse breakout transaction.
How do we conduct reverse breakthrough transactions?
It’s actually very simple. You only need to retrace the price below the trend line (here we choose a downward trend line).
This operation will be more safe and avoid your judgment error. You don’t want to see that the price runs below or above the trend line, but you find that the breakthrough is real and effective.
Borrowing the first graphic example, let’s take a look at the possible entry points.