A breaker block and a mitigation block are both concepts used in trading to understand price action and potential areas of support and resistance, but they have distinct characteristics and uses.
Breaker Block
What it is: A breaker block is a price level that acts as a strong resistance or support after a significant price move. It is formed when a previous high or low is taken out, and the price retraces to that level.
Explanation: For a bearish breaker, you would see a high, a low, and then a higher high. The low between these highs is the breaker block. When the price retraces to this low, it often acts as a strong resistance level.
Why it works: Breaker blocks are significant because they represent areas where institutional traders might have had losing positions that they want to mitigate when the price returns to that level. This creates a strong resistance or support.
Example: In the context of indices futures, if the NASDAQ forms a high, a low, and then a higher high, the low between these highs becomes the bearish breaker. When the price retraces to this level, it often acts as a strong resistance, preventing the price from moving higher [1].
Tips: Use breaker blocks as key levels for potential reversals or strong resistance/support. They are generally more formidable than mitigation blocks.
Caveats: While breaker blocks are strong, they are not infallible. Prices can still move through them, so always use proper risk management.
Mitigation Block
What it is: A mitigation block is similar to a breaker block but is generally considered weaker. It is formed when a high, a low, and a higher high occur, but the price does not make a lower low.
Explanation: For a mitigation block, you would see a high, a low, and then a higher high, but the price does not make a lower low. The low between these highs is the mitigation block.
Why it works: Mitigation blocks are areas where institutional traders might want to mitigate their positions. However, they are not as strong as breaker blocks because they can be traded through more easily.
Example: In the NASDAQ, if you see a high, a low, and then a higher high without a lower low, the low between these highs is the mitigation block. This level can act as a target for price action but is not as strong as a breaker block [2].
Tips: Use mitigation blocks more for targeting purposes rather than entries, as they can be traded through more easily than breaker blocks.
Caveats: Mitigation blocks are not as strong as breaker blocks and can be less reliable for predicting reversals. They are better used for identifying potential target areas rather than strong support/resistance levels.
Case Study in Indices Futures
In the NASDAQ futures, if you observe a high, a low, and then a higher high, the low between these highs can be a mitigation block. If the price retraces to this level, it might act as a target but not necessarily a strong resistance. Conversely, if you see a high, a low, and then a higher high with a subsequent lower low, the low between these highs becomes a bearish breaker. This level is more likely to act as a strong resistance when the price retraces to it [1] [2].
By understanding these concepts, you can better anticipate potential price movements and make more informed trading decisions.
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