What is a Breaker Block?
A breaker block is a specific type of price action zone that forms when a market reversal occurs after running liquidity. Unlike order blocks, which are areas of accumulation or distribution before a move, breaker blocks appear when the market retraces to the level where positions were invalidated, allowing institutions to manage or mitigate losses and re-establish their directional bias.
Why Breaker Blocks Matter
Breaker blocks provide crucial insights into areas where price is likely to face strong reactions. They act as:
- Indicators of Institutional Activity: Breaker blocks show where institutional traders were trapped or where they mitigated positions after price reversed.
- Reversal and Continuation Zones: These blocks can signal a change in trend or the continuation of an existing one when price retests them.
Identifying Breaker Blocks on a Chart
To spot a breaker block, follow these key steps:
1. Locate a Significant High or Low
Start by finding a swing high or swing low that led to a substantial move in price.
2. Look for Liquidity Run
Ensure that the swing high or low involved a run on liquidity (i.e., price spiked to trigger stop-loss orders above a recent high or below a recent low).
3. Find the Opposite Candle
Identify the last down-close candle (for a bearish breaker) or the last up-close candle (for a bullish breaker) before price made a higher high or lower low and then reversed direction.
4. Confirm the Breaker Block
When price reverses and breaks below the previous swing low (bearish) or above the previous swing high (bullish), the identified candle becomes a breaker block. Mark the range of this candle as the breaker block zone.
Types of Breaker Blocks
Breaker blocks come in two main forms:
1. Bearish Breaker Block
A bearish breaker block forms when price creates a swing high, pushes higher to run buy-side liquidity, and then sharply reverses, breaking below the previous swing low. This reversal traps long positions and signals potential selling pressure when price retraces to the breaker block.
Key Characteristics:
- Price forms a higher high, triggers buy stops, and reverses.
- The last down-close candle before this reversal is the bearish breaker block.
- The zone between the high and low of the breaker block acts as resistance when price revisits it.
Example: Imagine EUR/USD pushes above a recent high during a bullish move, creating a new higher high and triggering buy stops. Price then reverses sharply and breaks below the previous swing low, forming a bearish breaker block. When price retraces to this level, it is likely to face selling pressure, signaling a potential short opportunity.
2. Bullish Breaker Block
A bullish breaker block forms when price creates a swing low, pushes lower to run sell-side liquidity, and then reverses, breaking above the previous swing high. This reversal traps short positions and suggests potential buying interest when price revisits the breaker block.
Key Characteristics:
- Price forms a lower low, triggers sell stops, and reverses.
- The last up-close candle before this reversal becomes the bullish breaker block.
- The zone between the high and low of the breaker block acts as support when price revisits it.
Example: Consider GBP/USD dropping below a recent low, triggering sell stops and forming a new lower low. Price then reverses and breaks above the previous swing high, forming a bullish breaker block. When price retraces to this level, it faces buying pressure, indicating a potential long setup.
Trading Strategies Using Breaker Blocks
Breaker blocks can be used in various trading strategies, offering traders multiple entry and exit options:
1. Reversal Strategy
Use breaker blocks to identify potential trend reversals:
- Wait for a clear liquidity run above or below a recent high/low.
- Confirm the reversal when price breaks the previous swing point and creates the breaker block.
- Enter a trade when price revisits the breaker block zone and shows signs of rejection, such as wicks or a strong reversal candlestick.
Example: A trader notices a swing high is formed on AUD/USD, and price runs above it, triggering buystops. The price then reverses and breaks below the previous swing low, confirming a bearish breaker block. When price retraces to the breaker block, the trader enters a short position, placing a stop-loss above the block’s high.
2. Continuation Strategy
Use breaker blocks as continuation zones in a trending market:
- In an uptrend, a bullish breaker block can act as a support zone during pullbacks.
- In a downtrend, a bearish breaker block can act as a resistance zone during retracements.
Example: In an established uptrend on USD/JPY, a trader spots a bullish breaker block formed after price dips below a recent low, runs sell stops, and reverses upward. The trader waits for price to retrace to this breaker block, enters a long position, and rides the trend higher.
Combining Breaker Blocks with Other Tools
To maximize the effectiveness of breaker blocks, traders should use them alongside other analysis tools:
- Order Blocks: Breaker blocks in proximity to significant order blocks can strengthen the probability of price reactions.
- Fair Value Gaps (FVGs): A breaker block near an FVG suggests a stronger area of interest for potential reversals or continuations.
- Volume Analysis: Volume spikes at a breaker block zone can confirm the presence of institutional activity.
- Higher Timeframe Analysis: Confirming breaker blocks on higher timeframes, such as the 4-hour or daily charts, adds weight to their reliability.
Practical Example of Trading with Breaker Blocks
Let’s go through a practical example:
- Setup: The S&P 500 index creates a swing high at 4,500. Price pushes above this level, triggering buy stops and forming a new high at 4,520.
- Reversal: Price then reverses sharply and breaks below the previous swing low at 4,480. The last down-close candle before the new high (4,500 to 4,520) becomes the bearish breaker block.
- Trade Entry: The trader waits for price to retrace to the 4,500 level and shows rejection (e.g., with a bearish engulfing candle). The trader enters a short position, setting a stop-loss above 4,520 and a target at 4,450 for a favorable risk-to-reward ratio.
Tips for Trading Breaker Blocks
- Wait for Confirmation: Ensure price action confirms the breaker block with a strong reaction (e.g., wicks, rejection candles) before entering a trade.
- Align with Market Context: Use breaker blocks in conjunction with the overall market trend to increase the reliability of setups.
- Manage Risk: Always use stop-loss orders, ideally placed just beyond the breaker block, to mitigate potential losses.
Common Mistakes to Avoid
- Ignoring Volume: Without confirming volume, the breaker block may not represent strong institutional interest.
- Entering Prematurely: Entering trades before price confirms a reaction can lead to false setups.
- Neglecting Timeframes: Always validate breaker blocks across multiple timeframes to ensure they align with the broader market structure.
Conclusion
Breaker blocks are a powerful tool for identifying high-probability reversal and continuation zones in the market. By understanding how to identify and trade these blocks, traders can better align their strategies with institutional footprints and anticipate where price is likely to react. Integrating breaker blocks into your trading approach offers an edge in navigating market reversals and trend continuations with confidence.
