Chart school · lesson 9 of 10

Breakouts, false breakouts and gaps

Every pattern in the last two lessons ends the same way: the price leaves it. This lesson is about that moment, and about how often it deceives.

The 5 drawings Check yourself

The idea

A breakout is the price moving beyond a level or the edge of a pattern. It is the event most pattern traders wait for, which is exactly why it is unreliable: many orders sit just beyond obvious levels, and reaching them can be the whole of the move.

A gap is a different kind of jump: a space on the chart where no trading took place. Both are easier to understand in a drawing than in words.

9.1Read either way

Breakout

What it looks like: The price closes beyond a level that had contained it: above resistance, below support, or outside the line of a pattern. A close beyond the level counts for more than a wick beyond it.
What traders read into it: The side that had been defending the level has given way. Traders read a decisive close, on a candle larger than its neighbours, as acceptance of the new prices.
Where it fails: Most of this lesson is the answer. Breakouts fail often, and they are most tempting exactly when they are least clear. A break also gives no measure of how far the price will go.

Breakout, in the glossary

9.2Read either way

False breakout

What it looks like: The price moves beyond a level, fails to stay there, and returns inside. On the chart it is often a single long wick through the level, or one candle out and the next one back.
What traders read into it: Those who acted on the break are now on the wrong side. Traders read the failure itself as information: the level was tested and the test was rejected.
Where it fails: A false breakout is only known afterwards. At the moment of the break, the real and the false look the same, and no rule separates them in advance.

The false breakout, in the Playbook

9.3Read either way

Breakout and retest

What it looks like: After breaking a level, the price returns to it from the other side, holds, and moves on. It is the role reversal of lesson 6 seen at the moment it happens.
What traders read into it: The return shows whether the new side will defend the level. Many traders prefer to see the retest hold before treating a breakout as real.
Where it fails: Waiting for a retest means missing every breakout that never looks back. And a retest that fails turns the move into a false breakout.

Pullback or reversal, in the Playbook

9.4Read either way

Gap

What it looks like: One candle begins away from where the last one ended, leaving a space on the chart. It happens when the price changes while the market is closed or when news arrives faster than orders can be matched.
What traders read into it: Opinion changed all at once. Traders note the edges of the gap, which often behave like support or resistance afterwards.
Where it fails: An order cannot be filled inside a gap. A stop that sits in the empty space is filled at the next available price, which can be much worse. In currencies, gaps mostly appear at the weekend open.

When the price gaps, in the Playbook

9.5Read either way

A gap that fills

What it looks like: After a gap, the price returns and trades through the empty space, back to where it was before the jump. The gap is then said to be filled, or closed.
What traders read into it: The sudden change of opinion did not last. Traders watch whether the price stops at the far edge of the gap or carries on beyond it.
Where it fails: “Gaps always fill” is a saying, not a fact. Some gaps are filled within the hour, some after months and some never. It gives no timing and no promise.

Gap, in the glossary

SimulationEvery drawing is invented to show a shape as plainly as possible. None of them is a market, and a real chart is rarely this tidy. Educational information, not investment advice or a recommendation to trade.

To carry away

Lesson 9, in four lines.

01
A breakout is a close beyond a level. A wick beyond it is only a visit.
02
False breakouts are common and can only be identified afterwards.
03
A retest shows whether a broken level has changed role.
04
No order is filled inside a gap. A stop there is filled at the next available price.

Check yourself

Three questions on this lesson.

Choose an answer and press Check. You can try each as often as you like. No answer is stored, nothing is sent anywhere and no score is kept.

Question 1 of 3
What distinguishes a false breakout from a real one at the moment of the break?
The colour of the candleNothing reliable; it is known only afterwardsThe time of day
Question 2 of 3
What is a retest?
A second breakout in the opposite directionA candle with two wicksThe price returning to a broken level from the other side
Question 3 of 3
A stop-loss order sits at a price inside a gap. What happens to it?
It is filled at the next available price, which may be worseIt is filled at exactly its own priceIt is cancelled

An explanation for study. It is not advice, a recommendation or a forecast. No pattern is reliable on its own, and a shape described here says nothing certain about what a price will do next.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

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The idea of this lesson

Lesson 9, in four lines.

Three questions on this lesson.

The idea of this lesson

Lesson 9, in four lines.

Three questions on this lesson.