Method
False breakouts and stop runs
Price pokes through an obvious level, trips the orders there, and reverses.
There is evidence for why price behaves this way. No published rule profits from it after costs.
Stop and take-profit clustering at round numbers is documented in one dealing bank's order flow. That fits the pattern of breaks that fail. No rule that profits from it was found.
What it is
Stops and take-profits cluster near obvious levels and round numbers. Price moving through them triggers those orders, and if no buyers or sellers follow, the move fades.
What it suggests
The clustering is measured. Claims that banks deliberately hunt individual stops are a narrative the chart cannot show.
How to check it
Place stops beyond the zone rather than at the obvious price, and wait for a close outside before treating a break as real.
Common mistakes
- Placing the stop exactly where everyone else does.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: a poke beyond a swing zone that closes back inside within 3 bars
- Measure: average excursion in the opposite direction over the next 10 bars
- Window: next 10 bars
- Compared with: pokes that held outside
Sources
- Osler (2003), Currency orders and exchange rate dynamics: an explanation for the predictive success of technical analysis, Journal of Finance 58(5) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.