Breakout vs Reversal
Michael Whitman
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Trading since 2017, full-time since 2020
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Published 2026-09-08
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Updated
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Reviewed
Breakout trading enters as price closes through a level, while reversal trading enters as price fails at one. Both read the same level on the same day and take opposite sides, and on SPY neither close told you much about what came next.
Price reaches a level it has not touched in three months. If it closes above, a breakout trader buys; if it closes back below, a reversal trader sells. Both are reading the same session. On SPY the question worth asking is whether that close said anything about the next big move, and it mostly did not.
What each one is
A breakout trade enters as price closes through a level. The bet is that clearing the level says something about the balance of buyers and sellers. Breakout covers the entry.
A reversal trade enters as price fails at a level. The bet is that the failure starts a move the other way. Reversals covers how a turn is confirmed.
Both require the level first. Without a line drawn before price arrived, neither trade has a definition.
Where they differ
Which close you act on. A session that trades through the level and closes above it is a break; one that trades through and closes back below is a rejection. They can come one day apart at nearly the same price.
Where the stop goes. The breakout has the level just behind it. A reversal taken at a fresh high has the session’s own high behind it, which is often only a small distance away.
Which result you need. The breakout needs the next large move to be up; the reversal needs it to be down. The data below checks how often each happened.
How often each chance comes. At SPY’s 60-session high, closes above outnumbered rejections, 697 to 571, so a reversal trader at that level waits for the less common close.
What followed each close
A large drop came first equally often. From the close of the test session, a close 2 average true ranges lower came before a close 2 ranges higher in 35.01% of breaks and 35.03% of rejections. Across all ordinary sessions the figure was 36.67%. A rejection at a fresh high was not followed by a drop any more often than a session chosen at random (p = 0.44).
Rejections were followed by a rise first slightly more often. A close 2 ranges higher came first after 52.54% of rejections, against 48.49% after breaks and 48.04% on all sessions. Against all sessions that is p = 0.03, but tests at a rising high cluster on consecutive days, so the true uncertainty is larger. Breaks against rejections: Fisher p = 0.16.
Neither move came in 20 sessions after 16.50% of breaks and 12.43% of rejections. When a move did come, it took a median of 11 to 12 sessions upward and 7 to 8 downward.
Which one to use: Breakout or Reversal?
Use the breakout when the level gives your stop a place to sit. The cleared level is a defined point where the idea is wrong, and that is what lets the position be sized.
Use the reversal only when the failure has its own structure behind it. A rejected high with nothing above it but the day’s wick leaves a stop that any normal session can reach.
Use neither as a forecast. On SPY the close at a fresh high did not change the odds of the next large move in the direction either trader wanted.
And when the market is pressing a high day after day, expect both signals to fire. That is when tests cluster and each one says little on its own.
Both closes, one week: SPY, June 2026
The break. On 1 June 2026 SPY’s high reached $760.28, above the $758.08 high of 29 May, the top of the previous 60 sessions. It closed at $758.54, above the old level: a breakout close.
The rejection. On 2 June the high edged a few cents past the new 60-session high of $760.28, and the session closed at $759.57, back below it: a rejection.
What followed both. On 5 June SPY closed at $737.55, below the 2-range marks set from both closes, $744.97 from 1 June and $746.45 from 2 June. The reversal trade got its drop and the breakout trade lost, but a week earlier the same rule had produced closes above the high that were followed by the same drop.
The original data
The sample. The highs, lows and closes Yahoo Finance publishes for SPY’s daily bars, 29 January 1993 through 2 October 2026. Tests run from 10 January 1994 to 13 August 2026, the last one with 20 sessions still to come.
The rule. The level is the highest high of the previous 60 sessions. A test is a session whose high reaches it after a close below it. A close above the level is a break, anything else a rejection. From the test session’s close, the first close within 20 sessions that is 2 times the 14-session average true range (Wilder, on the test day) above or below decides the outcome; otherwise neither. The same rule from every session gives the base rates: 48.04% up first, 36.67% down first, 15.30% neither, over every session with 20 sessions to come.
The counts. 1,268 tests: 697 breaks (338 up first, 244 down first, 115 neither) and 571 rejections (300, 200, 71). Exact binomial tests against the base rates; Fisher tests between the two groups. All tests with their outcomes are in the SPY 60-session-high tests file.
When it fails
The failure is switching sides the moment the first trade is wrong, and paying twice. A close above the high is bought; the next day closes back below and the position is reversed into a short because a failed break looks like a reversal. On SPY a rejection was followed by a large drop no more often than any other day, so the second trade carries the same uncertainty as the first, plus a second round trip. Neither trade was given the stop it was entered with.
The second failure is assuming most tests of a high fail. On SPY more than half closed above it.
A third is judging either method on a handful of trades. Tests cluster, and a single strong week can produce a run of identical signals.
A fourth is a reversal stop inside the day’s range. The next session’s ordinary range can reach it.
And a fifth is drawing the level after the fact. Both trades then look easy.
Related
Breakout covers entering on a close through a level. Reversals covers how a turn is confirmed before it is traded. And support and resistance covers drawing the level both trades depend on.
Pick the side whose stop has a real place to sit, and size it for being wrong. At a fresh high, neither the close above nor the rejection told you which way the next big move would go.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.