Featured Article

False Breakout and Reverse Thrust

BrandonWendell
Brandon Wendell
Instructor, CMT

I have been watching several posts on social media regarding trading silver.  There was a lot of excitement about the possibility of going long on MCX Silver.  I wanted to caution traders about jumping in too soon to trades and failing to look at multiple time frames to confirm entry.

In the silver weekly chart, there was a post saying to enter a long on Silver in a test of demand and a breakout of the down trend line.

Online Trading Academy students are aware of the odds enhancers we use to determine whether we should take a particular trade.  In this case, the test of the demand was not the first and had a lower probability of working.  Looking at a daily chart, price broke out of a consolidation phase only to run straight into a strong supply zone.

When we have a breakout like this, it is common for many traders to chase price only to catch it as it reverses.   In order to prevent catastrophic losses, many will exit the trade or get stopped out.  This action usually causes a thrust in the opposite direction as evidenced by the large red candle after the breakout.

The same happened on a larger scale back in the beginning of the year.  I was watching a symmetrical triangle breakdown and was convinced of a bearish move into the mid 40,000’s on silver.  While we did breakdown, it was a false move and led to a thrust in the opposite direction.  That is why I usually do not trade the breakouts but wait for higher quality bounce trades.

This movement created a topping tail on the weekly chart that signals that selling pressure is still strong in silver.  Currently silver and gold are moving with the global equity markets and there is not much opportunity to the long side.  Price is a lot like water, it will flow in the easiest direction with the fewest obstructions.  In the case of silver, there is a lot of overhead supply and not much demand below.

Trade safely, use the tools you learned in your Professional Trader course and minimize the emotional impact on your trading.  The worst thing you can do is to chase price only to catch it before it reverses sharply against you.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.