The Anatomy of a Failed Breakout

One of the most overlooked and profitable swing trading setups is the failed breakout.  This setup is great for part-time stock traders looking to capture income generating trades in a short amount of time.

While most amueter swing traders focus on breakouts and throw a stock out if the breakout fails, pros switch gears and short failed breakouts.  Failed breakouts can provide momentum based gained at a faster rate than breakouts.

While there are many ways to trade failed breakouts, this 5 step setup is easy to identify and profitable for both swing and part time traders.

1) Look for momentum stocks near highs that show a momentum divergence.

2) Watch for a breakout

3) If a breakout closes below the old high, short the stock at the close or the following day open.

4) Place your stop above the breakout high.

5) You target needs to be at least 2x the stop level in order to get proper reward to risk.  If your stop is 2 points, your target must be 4 points.

Let’s look at BIDU’s recent breakdown to identify a good short entry.

As $BIDU neared highs in early September a negative momentum divergence was in play.  The stock broke to new highs, the closed below the highs the following day.  This gave us a short entry at $225.  Here we enter short and place a stop at the highs around $230.  The stock pulled back to the 50 day moving average around $210, giving us a 15 point gain and 3:1 on our risk.  The setup again came into play this week.

Now that you have have studied this example, find some failed breakout examples that made explosive gains and list them in the comments below.

Other articles in the breakout series:

Part 1: The breakout pullback setup

Part 2: The breakout-remount setup

Part 3: The breakaway gap setup

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