Breakdown Trading

Breakdown trading is the short-side mirror of breakout trading. A support, a range low, or a higher low gives way, and the trader sells the acceptance below it. The same confirmation rules apply: a close beyond the level beats a wick, a retest that fails is calmer than the first tick through, and the stop belongs back above the broken level or above the breakdown bar. In cash equities a breakdown also has to be borrowable. In a downtrend, breakdowns are continuations. In a range, they are traps until acceptance shows up. The chart pattern does not know which regime you are in. You have to.

Mark the floor before it breaks. If you only notice the support after the collapse, you are late, and the risk to the broken level may already be larger than the remaining room to the next floor. Require the close. Then locate the next real support and make sure the distance pays for the stop. A breakdown into a major weekly level is a poor short. You are selling into the very place where the bounce is supposed to be considered. Partial-cover at the next level. If the broken floor is reclaimed on a closing basis, the breakdown has failed and the short is over, whatever the larger story says.

Use breakdowns to enter shorts in an established downtrend and to exit longs that were leaning on that floor. Do not use them as a reason to short a bull market's first dip. One broken minor low in an uptrend is usually a deeper pullback, and the breakdown traders provide the fuel for the reclaim. Match the level to the trend. A weekly range breakdown is a different class of event from a five-minute shelf giving way, and only one of them should be allowed to change a swing position.

Selling the low of a support test before it has broken, and calling it a breakdown. That is front-running, and it is a different, worse trade. Also holding a breakdown short through the next support because the breakdown "confirmed the bear." The next support is where the confirmation gets tested. And ignoring borrow and hard-to-borrow fees, which can turn a correct breakdown into a flat result.

Breakdowns gap. The stop above the level may fill far above it, or the better entry was never tradeable because the market opened through the floor. False breakdowns are common at obvious lows, which is the liquidity-sweep problem. A rule that sells every break of every low will be the inventory for those sweeps. Filter by trend, by the quality of the level, and by the room to the next one.