3/1/12 Seller Failure (Failed Breakouts): How to recognize the signal and how to enter the trade

I see the seller / buyer failure occur approximately 0-4 times a day. Some of them are very strong signals like the one below. I categorize a very strong signal as one that never re-tests those levels during the trading day. A signal that may not be as strong can generate the signal and then run in your favor for a few points, say 4 to 5 points, and then reverse back to the origination zone. Its important to decide whether the SF or BF trade will run or if it will only give you the opportunity to take a few points. Either way, its a very high probability low risk setup.

First you recognize a swing point that is to generate a breakout signal. It will either breakout and follow through; or breakout, trap the bears, and fail / rally.

You want to recognize the failure.

If the failure was valid and strong, the level should never get re-tested during the trading day.

On a smaller time frame chart, you see the breakout failure. Its visible that after the failure you had a quick move in the opposite direction. This is usually due to bears' stops getting hit after failing to breakout to the downside.

Here is the entry signal on the 50 tick

Instead of assuming this will happen, which is a reckless strategy, try to recognize it and enter into the stop run. What I try to do is enter a stop limit order about 2 points away from the failure swing low set in. The concept behind this is that you're getting swept into the move and if the seller failure is strong, the failure point should not get re-tested anytime soon. It should at least give you a comfortable move in your favor to allow you to move your stop above entry.

Let me know if you guys have any questions.