Breakout Confirmation: 110% and −10%

Every level so far has been inside the box. This chapter adds the first two outside it, and they answer the question that the last chapter left open: when price goes through R1, how do you know it will stay through?

The Problem With R1

R1 is the strongest level in the box, and the most watched. That makes it the level most likely to produce a false break.

A break of R1 is a public event. Every trader with a chart open sees it. Breakout buyers enter; the stops of the sellers who defended R1 are triggered and become buy orders; price jumps. Then, often, it stops. The initial rush of buying exhausts itself a little above the level, sellers who were waiting for exactly this moment come in, and price sinks back below R1 and into the box. The traders who bought the breakout are trapped above a level that has just been recaptured, and their own stops — now below R1 — feed the fall.