Breakout candles with nothing behind them on the next two bars

[Fairman]

Breakout candles with nothing behind them on the next two bars

A breakout candle on its own tells you very little. What happens on the next two bars tells you most of what you need. That's become the main filter I use for range breaks on M5.

When a real breakout happens there is usually follow through. The next candle opens near the close of the breakout bar and keeps going, or at worst it pauses with a small body and holds above the level. When the break is weak you see the opposite. The next bar opens and immediately trades back into the old range, or it prints a long wick on the breakout side and closes back near the level. By the second bar the move is already giving back more than half of the breakout candle.

So the rule is roughly this. No entry on the breakout candle itself. Wait for one bar. If that bar holds outside the level and doesn't retrace past the middle of the breakout candle, the trade is on. If it slips back inside, stand aside and watch whether the failed break turns into a move the other way.

This costs some entry price on the good breaks, no doubt about it. But it removes a big chunk of the trades where you buy the top tick of a stop run and sit there watching it fade.

[FXS Prop Desk]

Fairman, the next two bars after a breakout candle as a filter is a simple and practical idea. It might be worth testing what counts as "nothing behind it": a close back inside the range, or simply a lack of further progress. Each definition will give different results, and it is good to know which one works best. Splitting the results by session would add another useful layer.

[Fairman]

The midpoint of the breakout candle is the part I'd stress. Plenty of strong breaks pull back a little on the next bar and that's fine. What matters is whether the pullback stays in the upper half of the big candle. Once price trades through the middle, the buyers who drove it have usually stepped away, and the people who chased the high are now offside. That's often where the reversal starts picking up speed, because their stops are just below the level. In practice that means the stop for the continuation trade sits under the midpoint, not under the whole candle, which keeps it tighter and gives a clear line for when the idea is wrong.

[Fairman]

Session matters a lot for this. A break during the first hour of London has a much better chance of follow through than the same pattern at 15:30 London time when Europe is packing up. Late breaks often run a few pips, run out of participants, and slide back. If you test the two bar rule, split the results by hour. You may find it works well in the morning and barely at all in the afternoon, which would tell you to only trade breaks at certain times. The day of the week shows up too. Mondays and Fridays seem to produce more of the weak afternoon breaks on my charts than midweek, though that's a loose impression and needs proper counting before anyone leans on it. Holiday sessions in the US or UK make the afternoon problem even worse, since half the usual participants are missing.

[Fairman]

It helps to look at the size of the breakout candle against the recent bars too. A break made by a candle two or three times the average size of the last twenty bars is a different thing from a break made by a normal sized candle that just happens to close over the line. The huge candle often needs to rest before it continues, so the first follow up bar can be small without meaning anything bad. The normal sized one should get help quickly or it's probably nothing. A simple way to measure it is to divide the breakout candle's range by the ATR on the same timeframe. Anything above about two gets the extra patience.

[Fairman]

For the failed version, I don't flip short the moment the second bar closes back inside. The cleaner trade is to wait for price to come back to the broken level from inside the range and reject it. That gives a defined stop above the failed high and keeps you out of the cases where price chops around the level for twenty minutes before trying again. Patience on the failure trade matters as much as patience on the breakout itself. If the failure trade does set up, the first target is usually the far side of the old range, with a partial at its middle.

[Shadow Trader]

What does a candle look like once the spread is taken out? Spread-adjusted candles try to answer that, and the picture is less generous than the standard chart.

A normal bid chart shows a bar spanning, for instance, 6 pips from low to high. A long trader buys at the ask and sells at the bid, so the range actually available to capture is smaller by roughly the spread. With a 1 pip spread, that 6 pip bar offers about 5 pips between a realistic entry and exit. Small bars shrink proportionally much more. A 2 pip bar with a 1 pip spread has half its range spent before anything is earned.

Some overlooked things this reveals:

- The share of bars that are not tradable at all. In quiet periods, a large fraction of one-minute bars have ranges smaller than the cost of crossing the spread.
- Time of day differences. Overlap hours may have bigger bars and smaller spreads, so tradable range is much higher than in the late session.
- Rollover distortion. A wide spread can make a tiny move look like a big one on the ask side.
- Target realism. A 3 pip target on a pair whose typical tradable bar is 2 pips needs several bars of continuation.

Building this is simple if both bid and ask history are available: use the bid low and ask high, or compute range as high minus low minus the spread at that moment, and plot or average it per hour.

Do you measure average tradable range per session, and does it change which hours you scalp?