Mastering False Breakouts: Turn Market Disappointments into 20% Gains

Discover how a failed breakout led to a 20% gain in Arista Networks. Learn the secrets of turning market setbacks into profitable opportunities with our expert swing trading strategy.

Hey there, Market Warriors! Deron Wagner here, founder of Morpheus Trading Group. Today, I’m thrilled to share with you an eye-opening strategy that could revolutionize your trading game. Imagine turning a failed breakout into a whopping 20% gain in just a few weeks. Sounds too good to be true? Well, buckle up because that’s exactly what happened with our recent swing trade in Arista Networks (ANET).

We’ve all been there – watching a stock breakout, only to see it plummet days later, leaving a trail of discouraged traders in its wake. But what if I told you these failures could actually be hidden gold mines?

Today, we’re diving deep into the world of false breakouts, and our head stock analyst, Rick Pedicelli, is here to walk you through our potent strategy that’s been turning market disappointments into profit machines.

Understanding False Breakouts:

Before we dive into the juicy details of our ANET trade, let’s get crystal clear on what a false breakout actually is. Rick explains it beautifully:

“A false breakout occurs when a stock moves out from several weeks of sideways action, typically three to four weeks, breaks out, and then moves back into that base, undercutting the base high.”

The key here is timing. We’re not talking about breakouts that fail after two to three weeks – those are just pullbacks. We’re looking for breakouts that fizzle within five to seven days tops. This quick reversal is what creates our golden opportunity.

Why do false breakouts happen? It’s often due to late-to-the-party buyers jumping in at obvious entry points. When the stock fails to follow through, these newer traders are quick to exit, triggering stops and creating a snowball effect of selling.

The ANET False Breakout Setup:

Now, let’s dissect our ANET trade. This setup was particularly interesting because it wasn’t your typical two to five-day false breakout. Instead, we saw a pullback reset over several weeks.

Here’s how it played out:

1. The Initial Breakout: ANET broke out above an
   obvious high.
2. False Move: It attempted to move higher but failed
   within about eight days.
3. The Pullback: The stock pulled back, undercutting
   the low of the breakout day.
4. The Setup: Price action tightened up significantly,
   going from a 12% range to just 3.5-4%.
5. The Entry: On June 11th, we placed a buy stop
   above the high of June 10th, which was also above
   the downtrend line and the 8 and 20-day EMAs.

What made this setup so powerful was the combination of technical indicators aligning perfectly. We saw a touch of the 10-week moving average, bullish reversal action, and a tightening price range. This convergence of factors gave us the confidence to enter the trade.

Risk Management and Trade Execution:

One of the most crucial aspects of trading false breakouts is managing your risk. In the ANET trade, we placed our stop beneath the 289 level. This gave us enough room to withstand some volatility while still protecting our downside.

As the trade progressed, we took a tiered approach to taking profits:

• We took some off the table for a 9% gain on June
  13th.

• We took more off for a 15% gain on June 21st.

• We continue to hold a partial position with a 20%
  gain, using the 8-day EMA as our trailing stop.

This approach allows us to lock in profits while still participating in potential further upside.

Key Takeaways for Trading False Breakouts:

1. Look for Gentle Pullbacks: Ideal false breakout setups often involve a gentle pullback rather than
extreme volatility.

2. Use Moving Averages: The 8, 20, and 50-day EMAs can provide excellent entry and exit points.

3. Be Patient: Wait for the price action to pause at a moving average, stall, and then push higher before
entering

4. Manage Your Risk: Have a clear plan for stop placement and stick to it.

5. Take Partial Profits: Don’t be afraid to take some money off the table as the trade moves in your favor.

6. Stay Flexible: Be ready to re-enter if you get stopped out but the setup remains valid.

7. Protect Your Mental Capital: Develop a systematic approach to exiting trades to avoid emotional
decision-making.

Bonus Tip:

If you find yourself caught in a false breakout, consider this strategy:

• Place a stop beneath the low of the breakout day and
  sell partial size there.
• If it closes below the breakout day, sell more or all of
  your position.
• If it goes below the day that undercut the breakout
  day low, exit any remaining position.

Remember, Market Warriors, failed breakouts aren’t failures – they’re profit opportunities in disguise. By mastering this strategy, you’ll be able to feast while others starve in the market jungle.

Conclusion:
Trading false breakouts requires a combination of technical analysis, risk management, and psychological fortitude. By following the strategy outlined in this post, you’ll be well-equipped to turn market disappointments into profitable trades.

There’s a lot more in this video. So WATCH!

Elevate your trading journey with Morpheus Trading and Rick Pedicelli’s wealth of experience.

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In trading, the learning never stops. Keep pushing, keep growing, and always trade with confidence.
And always remember, trade what you see, not what you think!

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Thanks for joining us on this journey, and until next time, happy trading!

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