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Failed Breakout Reversalthe break that does not stick

Evidence: ModerateIntermediatePrice action · Reversal

Price breaks a level, everyone who was waiting for the break is in, and then it closes back inside. Those positions are now wrong, their stops sit just beyond the level, and the move away from it is fed by them being taken out.

This is one of the better-supported price-action setups because it has an actual mechanism rather than a shape: a failed break creates a known pocket of trapped orders, and the trade is against them.

The level is the edge. The candle is the timing and the stop placement — useful, and a far smaller claim than the one usually made for it.

Category
Price action · Reversal
Timeframe
H1 execution · the level from H4 or D1
Suitable pairs
Majors · gold · indices
Session
The failure must happen in London or New York. An Asian-session false break has nobody trapped in it.
Indicators / tools
A level with two or more touches · ATR(14)

Valid setup

PA-07 · FAILED BREAKOUT REVERSAL — VALID SETUP USDJPY · H1 · three closes above a twice-held level, then a close back inside it SHORT 150.68 151.09 151.51 151.93 152.34 152.76 153.17 TP1 = 2R 1R — the trapped stops sit in here STOP = above the failed break + 0.4 × ATR(14) THE LEVEL — held twice before the break ENTRY = close back inside the level TP1 = 2R 1 2 3 4 152.93 152.40 152.26 150.92 ① First hold — the level exists ② Second hold — orders are now resting above it ③ A CLOSE above, not a wick. The break is real ④ Close back inside within three bars — the break failed ⑤ Everyone who bought the break is now trapped ⑥ Ten-bar time stop: the effect does not last

Exact rules

Entry

  • A level that has held at least twice, so there were orders resting beyond it.
  • Break: at least one close beyond the level. A wick through it is not a failed breakout, it is a wick — and treating the two the same is the most common error on this page.
  • Failure: a close back inside within three bars.
  • Enter at that close, in the direction of the failure.

Stop loss

  • Beyond the extreme of the failed break, plus 0.4 × ATR(14).
  • That extreme is where the trapped stops are. If price returns there, the trapped traders were right and you were not.
  • Risk 0.5%–1%.

Take profit / exit

  • TP1 at 2R.
  • TP2 at the opposite side of the range the level belonged to — that is where the next set of orders sits.
  • Time stop at ten bars. The trapped-order effect is short-lived; after that you are holding a directional bet with no thesis.

Build Failed Breakout Reversal

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Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.