There are times in the market when a trader sees that a stock is consolidating and expects a strong move after the consolidation breakout. The breakout does come. But, to their dismay, the price has not moved much in the direction of the breakout and has quickly reversed. The worse part about this is if the trader has participated in the breakout, they are now stuck in the trade. If this has happened to you, read this newsletter till the end to understand how to make these kinds of breakouts your strength using Point and Figure charts.

Understanding breakouts on PnF charts

PnF charts are breakout charts. On these charts, when the price is rising, the chart plots ‘X’ on top of the previous ‘X’ to form a column of X. Similarly, when the price is falling, the chart plots ‘O’ below the previous ‘O’ to form a column of O.

PnF charts are called breakout charts because the most basic pattern of this charting method is a breakout pattern. The bullish breakout pattern is called a Double Top Buy (DTB) and the bearish breakout pattern is called a Double Bottom Sell (DBS).

A DTB forms when the price is in column of X, reverses and changes to column of O and again reverses to the column of X and rises to plot X(s) above the previous column of X. Similarly, a DBS forms when the price is in column of O, reverses and changes to column of X and again reverses to the column of O and falls to plot O(s) below the previous column of O.

A DTB shows a breakout from the high of the previous column of X. Therefore, showing bullishness of price. A DBS shows a breakout from the low of the previous column of O. Therefore, showing bearishness of price. To participate in the breakout, the trader may buy or sell after the DTB or DBS triggers respectively.

But, at times, these breakouts are not strong.

The concept of Weak breakouts on PnF charts

Weak breakouts on PnF charts show the lack of strength in the breakout. It shows that even though the price did manage to breach the previous levels, it wasn’t strong enough. There are two types of Weak breakouts: Bullish and Bearish.

Bullish weak breakout form when only one or two boxes of O plots after a DBS trigger and the price enters the column of X. This shows bullishness of the price.

Bearish weak breakout forms when only one or two boxes on X plot after a DTB trigger and the price enters the column of O. This shows bearishness of the price.

How to make Weak breakouts a strength

The trick to avoid weak breakouts is to avoid trading breakouts that are in the opposite direction of the trend. If the trend is bullish and the breakout is bearish, the probability of the breakout becoming a bullish weak breakout is high. The same logic goes for a bullish breakout.

To use weak breakouts to your advantage, trade them as part of a bigger pattern like Trap, Turtle, or ABC and trade them in the direction of the trend. The trader can add trend filter like Exponential Moving Average (EMA), Super trend, or MAST indicator. EMA line is used in the following example.

Price trading above the EMA line is considered to be in bullish trend and price trading below the EMA line is considered to be in bearish trend.

Trade bullish weak breakouts with bigger bullish patterns when the price is above the EMA line.

Trade bearish weak breakouts with bigger bearish patterns when the price is below the EMA line.

The trader can spot a DBS in a bullish trend and wait for it to turn into a bigger pattern and then trade them. Similarly, the trader can spot a DTB in a bearish trend and wait for it to turn into a bigger pattern and then trade them.

Observe the chart below. The bullish weak breakout column is marked as WB+ and bear trap pattern is marked as green line. Although there are 4 bullish weak breakouts, only the ones which converted into a bear trap worked pretty well.

Observe the chart below. The price is trading below the EMA line. The price made two Weak bearish breakouts (marked in red). They were also a part of bull trap patterns.

In my course, How To Trade Point and Figure, I have explained these bigger patterns. These patterns along with other indicators can help you improve your trading skills. In this course I take you through the calculations of the indicators, the logic behind the patterns and the places to spot them, and many other concepts. If you are interested in learning the art of analyzing charts using Point and Figure, do click the link below. 👇🏻👇🏻👇🏻