100 trades of the Failed Breakdown (FBD)

Adam Mancini‘s core setup is the Fake Breakdown (FBD), also known as the 2B Pattern as analyzed by Victor Sperandeo (Trader Vic). <– The link explains the setup in depth so I won’t rehash too much, but below is the general gist of the pattern:

For an FBD: essentially, price will make a new low, reverse, then undercut that low (triggering everyone’s stop losses), and then reverse again (market: “JK JK GOTCHUUUU LOLZ”) and take off. Having felt the pain MANY TIMES of being the trader whose stop loss was triggered and then watch price take off with out me, I can attest to validity of this setup. (For a Fake Breakout (FBO), the inverse happens: new high, reverse, fake breakout, then reverses.)

I’ve heard that it’s a good idea to work towards mastering just ONE SETUP in the beginning, so I’ve decided to focus on mastering the FBD.  According to Mancini, regular breakdowns and breakouts have a 45-55% win rate; fake breakdowns/breakouts have roughly a 75%+ win rate if learned and properly mastered.  And fake breakdowns are a higher probability/occurrence than fake breakouts.

Given that markets tend to chop 80% of the time and trend the other 20%, it makes sense to study a setup that lends itself to choppier conditions. Remember: chop is charactered by range-y, ping-pong-y action with poor follow-through…which are pretty good conditions for fake outs.

My plan is to take 100 consecutive fake breakdown trades on /MES and document them on a spreadsheet with detailed notes. I think 100 straight FBD trades will be great experience for me. I realize I won’t catch them all since having a little one makes my schedule a bit unpredictable, but as the saying goes, “There’s always another trade,” which is also good “no fomo” practice for me.

Here are the specific FBD criteria/guidelines that I’m going to be looking for:

• To get even more granular, I’m only going to be looking for FBDs of the previous low (as opposed to a FBD/reclaim of a Mancini major level, though, often a previous low will be near/at a Mancini key level).  This could be the overnight low, the previous day’s low, or the low of the day (often set in the morning).  I’m choosing to look for this kind of low for now because it’s most easily identifiable on an intraday chart. I prefer a distinct low (a clear candle/wick would be nice) over a low that is part of a basing structure (like a flag).
• I would like to see a bottom wick on AT LEAST the 15 min chart (ideally, the wick shows up on the 30 min and 1 hr charts, too), showing that buyers are quickly (ideally within 15-30 min…ish) stepping in with some conviction.
• My entry will be at least 5 points above the low that is reclaimed. (In older tweets, Mancini has mentioned entering after 8-10 pts as a guideline to allow for some variance while learning.) This entry should be executed the first time the low is reclaimed.
  • Mancini has this to say about what helps him determine whether to enter a FBD immediately at the reclaim of the low or wait for more confirmation: “Risk reward (how far away is the first target), how long the wick is – I don’t want to chase so if its a longer wick into the failed breakout I will enter sooner, cleanliness of the setup (if its a more textbook setup I am fine entering earlier).” But for my purposes, I’m going to stick with a 5 pt confirmation for now.
• My stop will be under the fakeout low. Mancini tweeted, “For failed breakdowns it always goes under the low. I always use the tightest most technically valid stop possible, with failed breakdowns sometimes they can be only a few points.” However, if there’s a major level within ~3 pts of the fakeout low, I may allow for a few extra points of space, but careful to not extend beyond my max risk (15 pts in most cases; 25 pts in extreme volatility cases but the position size would be only 1 contract). If the entry trigger is above a major level, I MAY move up my stop to just below the major level zone to shave off a little extra risk, since a fail of that zone would likely mean a move back down past the fakeout low/new low of day (LOD) anyway.  As Mancini mentioned, I want to use “the tightest, most technically valid stop possible.”
• My risk-to-reward ratio target is ideally at least 1:1. The reward is dependent on how many points away the next level up would be. Risk spans from the entry point (~5 pts above the reclaimed low) to the fakeout low or the relevant major level around/between it.
• The FBD entry trigger should occur in the 8-11 am ET window (a little earlier is fine, too) or post-2 pm ET. 
• Ideally, the RSI on the 1 hr and 4 hr chart will have room for a move up.

Conditions/context is IMPORTANT:

• Volatile data days (FOMC, CPI, NFP, PPI, etc.) can be great for FBD setups, but know that it can also be random, noisy algo trading and inherently risky; Adam recommends sizing down on these days. He also recommends waiting approximately 30-45 min or so after the data releases to get the noise out of the way. Sometimes FBDs do trigger then, but moves are often extremely fast and whipsaw-y. Imma gonna wait for the dust to settle.
• What’s the context: Is the low a major level that’s been well-tested and COULD actually fr fr breakdown? (Mancini gets a little wary after 2 or 3 tests, but we’ve also seen levels hold 15+ tests so ¯\_(ツ)_/¯ …just something to be aware of.) Did the market make a big run the previous day, and now Mancini says it’s likely time for chop and tactical trading? Will the market likely be in a tight, annoyingly coiled range because it’s waiting on a market event to occur the next day?
• …which leads me to this point: there’s chop, and then there’s LOW-QUALITY chop. Chop gives you a range to work with, and FBDs tend to work pretty well. LQ chop can be seen as a realllly tight range, or it will something have a “magnet” level where price might pop a little above, then a little below, but seemingly returns to the magnet. Mancini will sometimes call it out, and it’s worth heeding his callouts since he has YEARS of market experience and screen time under his belt. If I’m looking for high-quality conditions for FBDs, I’m going to avoid trying to force a trade during times like this.
• Chart context: if the low is at a major support level (like, we’re talking major on the daily chart), chances are pretty good that price could pull a FBD there. Big levels don’t generally flush on the first touch; there are no absolutes in trading (could always flush hard on the rare black swan event), but the probability is in favor of a FBD.

Risk Management:

• The plan is to take 2 contracts in good conditions, sell 1 at the first level up, then let the second one (the runner) ride with a trailing stop loss. At this point, I’m thinking that the runner’s stop loss would initially move up to breakeven, or just a little below for a tiny loss (but still stay green overall). Mancini has a “no red to green policy”, where if a contract is nicely up 10-15 points, he doesn’t let it go red and stops out before then.
• In iffy conditions, I’ll only take 1 contract and sell at the first level up.
• I hope to eventually move up to 3 contracts (sell 2 at the first level, then leave 1 as a runner), and then the GOAL goal is 4 (sell 3 at the first level, leave 1 as a runner). Mancini has mentioned that his edge comes from this level-to-level risk management system more than the setup: secure 75% of position in profit, keep 25% in as a runner.  I’m sure the math maths better over the long run when you’re able to divvy up your position in 75/25 portions, so that’s what I’ll eventually be working toward. Of course, 4 contracts comes with a greater amount of risk than I’m currently willing to stomach at the moment, so one step at a time!

(I may add more to this list (or simplify it) as I go along. I also hope to include some trade reviews of the 100 FBDs.)

But I think most importantly, if the basic FBD setup is not present, there’s no trade. So if price comes close to the previous low but never undercuts it, I’m not going to trade it…even if it springs back up and takes off. No setup, no trade!