Trading a breakout is difficult for most traders due to the danger of false breaks. This happens when price setups a break but then actually fails to continue.
Is there a way how you can avoid fake breakouts?
Luckily there are tools and methods that help our odds of success. This article explains how we use the candlestick wick to measure the strength or weakness of a breakout. (Video of this article is at the very bottom)
Also check our complete Elliott Wave and Fibonacci guide.
Trading breakout setups and fake breakouts can be challenging. It’s seems to be “Murphy’s law” that traders choose the wrong side when trading breakout setups:
Confusing right? Is there a solution?
No method is perfect but Nenad and I prefer using two main concepts for choosing the right direction, besides our “5 Key Tips for Trading Breakouts Like a Pro Trader”:
Today’s focus is on the second point: candlestick wicks.
Before we explain our method of analyzing candlestick wicks, let’s first explain how to measure the candlestick wick and how to measure the wick percentage.
Image showing wicks on top of the candlestick (red) and wicks on the bottom (blue).
Candlestick wicks are measured like this for bullish candle:
Candlestick wicks are measured like this for bearish candle:
The wick percentage is measured by taking the wick and dividing by the candle size.
Image showing false break.
The trick and key tip is to focus on the breakout candlestick. This candle is the most important candlestick because that is when the market is testing the support or resistance (S&R) level, which is called a “decision zone”.
Decision zones are where price shows its true intent and direction:
For instance, look at the chart example here where I was looking for a break of the contracting triangle chart pattern (purple lines).
The decisions zones are the purple trend lines in this case:
Image showing good breakout candle
I entered the 3rd one, the bearish candlestick breakout, at the orange box and saw the trade close for a +44 pip win at the blue box – the entry was based on the ecs.SWAT system.
The main message is this:
The candlesticks challenging S&R levels and decision zones are the most important ones to monitor.
Here is a step-by-step overview:
The next part of our article will explain how the interpret the breakout candlestick.
The key ingredient is the candlestick close.
This measures whether the breakout is strong or weak:
To understand what is strong or weak, it is also important to know the direction of trading:
Image showing good breakout candles.
Now we can combine both parts:
Which time frame?
Traders can use the same time frame as the entry or zoom out one time frame to confirm the breakout there. For example, if I’m looking to trade a break of the 1 hour support level, using the 1 hour candle for the breakout measurement is fine but using the 4 hour chart is ok too.
Image show strong candle closes up and down.
A strong candlestick close sounds useful but how do you know what is “strong” or “weak”?
Luckily, this is a simple calculation. All you need is to do is this for bullish breakouts (bearish in brackets):
Let’s use a bearish example on the GBP/USD:
With the numbers mentioned above, we can see that the GBP/USD has this breakout:
Image showing bearish candle example.
The last and final step is to understand which breakouts are strong and which ones are weak. That is why we made a guide how to compare candle wicks.
Remember, a candle that has little or no wick is showing a strong candle close. The two are opposites of each other: a wick indicates a weak candle close.
Here is the rule book used for measuring breakouts:
Image show breakouts.
What are good breakouts?
The above guidelines helped me with multiple aspects:
If you still find trouble applying the methods above, feel free to join our telegram group by either purchasing the monthly access for €109/month or by joining one of our supported brokers and getting a free month of signals.