Setups 2 and 3: Failed breakout, and pullback to a level

Two more setups, built from the same parts. The failed breakout is what happens when the breakout in Lesson 2 does not hold; it trades in the opposite direction with a different trapped group. The pullback to a level is the basic trend-continuation trade, and it is the one most traders should learn first because the trend does most of the work.

Setup 2: Failed breakout

The sequence:

1. A level exists (range top, swing high, prior day high).
2. Price trades through it, by wick or by a brief close.
3. Within one to three candles, price closes back on the original side of the level.
4. Entry in the direction of the failure; stop beyond the extreme of the poke; target at the opposite side of the range or the next level.

                    |
                  +---+     |
  75.30 ----------|---|---+---+--------------------
  zone  //////////|///|///|###|////////////////////  <- range top
  75.00 ----------+---+---|###|--------------------
         |          |     |###|
       +---+              +---+
       |   |                |     |
       +---+                    +---+
         |                      |###|
                                +---+
                                  |
       1        2         3       4

Who is trapped: everyone who bought the breakout on candle 2 (75.00 to 75.80) and at the open of candle 3. They bought the highest prices on the chart and, one candle later, are all underwater. Their stops sit below the range top or below candle 2's low (74.70), and candle 3's close at 74.50 has already triggered many of them. The remaining ones sell any rally back to 75.00 to get out flat.

This is the setup with the largest and most painful trapped group per candle, because breakout buyers are by definition buying at the extreme. It is also why candle 3 is so often an outside bar or a bearish engulfing (Module 2): the reversal from above the level to below it covers the whole previous candle.

Entry, stop, target, with average range 1.00:

• Entry: 74.30, a break of candle 3's low (confirmation the failure is continuing).
• Stop: above the poke's high, 75.90, plus buffer 0.20: 76.10.
• Target: the range bottom, say 71.80.
• Risk = 76.10 − 74.30 = 1.80. Reward = 74.30 − 71.80 = 2.50. R:R = 2.50 ÷ 1.80 = 1.39.

A modest R:R because the poke was tall. A shorter poke (high 75.50) gives a stop at 75.70, risk 1.40, R:R 1.79. The size of the wick sets the stop, and the stop sets the R:R; there is no way around this.

Key idea: A failed breakout traps the traders who bought the extreme. The stop goes above that extreme, because if price accepts back above it the breakout was not a failure after all.

Where it fails: in a genuine trend. A "failed breakout" against a weekly uptrend is usually just a pullback that resumes. Run the multi-timeframe check; failed breakouts are strongest at range edges and at levels the context timeframe also sees as resistance.

Setup 3: Pullback to a level in a trend

The sequence:

1. The context and trading timeframes agree on a trend.
2. Price pulls back to a level: the most recent higher low, a flipped resistance, a prior day low in an intraday uptrend, or an anchored VWAP.
3. A candle at the level shows the pullback ending (hammer, engulfing, or an inside bar followed by a break in the trend direction).
4. Entry with the candle; stop beyond the pullback low; target at the most recent swing high or beyond it.

This is the Module 5, Lesson 1 worked example, so the numbers are already familiar: uptrend, level 61.80, hammer on day 5 with low 60.90 and high 62.30, average range 1.30.

• Entry: 62.30, break of the hammer's high.
• Stop: 60.90 minus buffer 0.26: 60.64.
• Target 1: the prior swing high, 66.40.
• Risk = 62.30 − 60.64 = 1.66. Reward = 66.40 − 62.30 = 4.10. R:R = 4.10 ÷ 1.66 = 2.47.

Who is trapped: the pullback sellers of days 2-5, and specifically those who sold below 61.80 on day 5. Who squeezes them: the trend buyers, who have defended every higher low so far. The trend is doing the work; the level and the candle just tell you where and when.

Why the pullback is the beginner's setup

• The stop is close (just beyond the pullback low, which is a defined swing).
• The target is defined (the last swing high) and usually further than the stop, so the R:R is naturally favourable.
• The trend is a tailwind: even a mediocre entry tends to get bailed out by the larger structure.
• The failure mode is clean: a close below the pullback low is a CHoCH, and the trade is wrong for a reason you can name.

Where it fails: deep pullbacks that break the higher low (a CHoCH), mature trends where the last swing high is close and the R:R is poor, and pullbacks with no candle, where you are buying a falling price at a line and hoping.

Comparing the three setups

All three have the same shape: a trapped group, a candle that shows them being squeezed, a stop where the story breaks, a target at the next place the opposition is expected. Learn the shape and the setups are three examples of it.

Try it: On one intraday chart, find one of each setup from the last two weeks. For each, write the trapped group in one sentence, then compute entry, stop, target and R:R using the buffer rule (20% of average range). Compare the three R:R figures. Which setup gave the best number, and was that because of the stop distance or the target distance?

Recap

• Failed breakout: a poke through a level followed by a close back on the original side; trapped group is the breakout buyers; stop beyond the poke; strongest at range edges.
• Pullback to a level: trend plus a level plus a reversal candle; trapped group is the pullback sellers; stop beyond the pullback low; target at the last swing high.
• The pullback is the beginner's setup because the trend does most of the work and the failure (a CHoCH) is clean.
• All three setups share one shape: trapped group, squeeze candle, stop where the story breaks, target at the next opposition.
• The wick sets the stop, the stop sets the R:R; compute it before entering.