The SQUAT is your biggest enemy? Lol No!
In fact the opposite.
Without much dramatization, I wanna show you today that a “SQUAT” is a NORMAL price action.
More often than not (at least in a bull market).
But first, let’s start with:
What is a SQUAT?
Are squats, fakeouts, and failed breakouts the same?
Why are squats as normal as fish in the ocean?
(PS: This week’s title credit goes to the Varad & the TradingTribe.)
What is a SQUAT?
A squat is a price action, where the price breaks out of a breakout pivot signaling the start (or resumption) of a trend; but by the close of the candle, closes below the pivot.
A squat is a fake breakout.
& therefore it can also be called a “fakeout”.
PS: All squats will have an upper wick. The good ones will have a longer one. But not all upper wick candles are squats.
Are squats, fakeouts, and failed breakouts the same?
Squats and fakeouts are therefore the same.
But can we call it a failed breakout?
I wouldn’t.
As the breakout was never confirmed.
For a confirmed breakout (irrespective of the timeframe in question), the candle needs to close above the breakout pivot.
If it doesn’t, then the breakout never was.
So,
A failed breakout is a breakout that was confirmed but failed to give you a follow-through move.
The distinction is very subtle in my book. But it is an important one.
Below is an example of a failed breakout:
Divis Lab: weekly (top), Daily (bottom):
Contrast the failed breakout in Divis lab with a Squat (or a fakeout) in MRF below:
MRF: daily
On all 3 occasions, the price never closed above the breakout pivot. So squat, not a failed breakout.
Clear?
Alright. Less move forward.
Squats ain’t bad:
The common misconception about squats among beginner traders is that it’s a very bad thing. Some reactions are almost as if it is the end of the world.
But in a bull market.
More often than not, squats are not bad.
They are rather very common.
I mean, think about it.
An upper wick (supply) at a resistance?
My lord!
But, what did you expect? If not supply at a resistance?
Supply around resistance zones is the most common price action.
That is what leads to a squat.
And not only it’s not bad. Often, it signals that the real breakout might just be around the corner.
This real breakout might come, as soon as the next candle or after a few more candles (a peak reading of the existing supply-demand dynamics inside the base might help anticipate this better. But that’s not required and also is beyond the scope of this discussion).
Let’s look at some recent examples:
Azad Engineering Ltd: Squat
What came the next day?
Brother BREAKOUT
Protean: Squat
followed by a vicious breakout the next day.
Pakka: Squat
Breakout follows after a day.
Sometimes, the real breakout follows after several squats (eg MRF. 3 squats).
The more the number of squats in the base, the closer the real breakout is. More squats mean more absorption of supply and more weakening of the resistance.
And given that the demand is still high, the price will break out sooner or later.
(I will soon be talking about “how to deal with a squat?”. Soon!)
Summary:
Squats ain’t bad.
Not at all.
They are as common as fish in the ocean. not even kidding.
Talking about fishing.
I am teaching a batch of peak traders, “How to fish a High Tight Flag?”
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Yours
Sakatas “Squat ain’t bad” Homma
it was a wonderful read. you gave a clear clarity on distinguishing a squat/fakeout from a failed breakout🫡