What is a Throwback?
A throwback, in technical analysis, is when the price retraces toward the breakout point after moving through a resistance level. A resistance level is where the price has stalled or had trouble moving through in the past. When the price moves through that level it is called a breakout. Not all breakouts are followed by a throwback, but some are. A throwback is a move back toward the prior resistance level. A false breakout is when the throwback continues below the breakout/resistance level.
- A throwback is the retracement that occurs follow a breakout of resistance.
- The throwback may be followed by a continued move higher. Or, if the price continues to drop below the breakout point then the breakout may have failed.
- A throwback may provide a second entry opportunity if the initial breakout trade was missed. Some traders prefer buying on the throwback.
What Does a Throwback Tell You?
Following a breakout above resistance, a throwback is the downward movement or retracement which occurs following the upward thrust in price.
The term throwback is typically reserved for the first move back toward the broken resistance level following the breakout.
A throwback is often generated by short-term profit taking following the breakout. Day traders and other short-term trader may be watching a resistance level; when the level looks like it will break they buy in as well, helping to fuel the price higher. After the price has moved up, the short-term traders start to sell to lock in their profit. This pushes the price back toward the breakout level.
The selling may result in the price being pushed all the way back to the breakout point, or even slightly below. If the price continues moving higher following the retracement, the move can be considered a throwback. If the price retraces to the breakout point and then keeps dropping, that is called a false breakout.
Traders will watch volume to help determine if a throwback is likely to be followed by a move back to the upside (the breakout direction) or a false breakout.
A breakout on high volume is more likely succeed, meaning the price is more likely to continue moving higher following a throwback. Lower volume on the throwback also helps indicate that the selling is weak and price is likely to continue higher after the throwback. Although, nothing in trading is certain.
If volume is low on a breakout, the breakout is more likely to fail. The throwback following the breakout is likely to continue, with the price falling back below the breakout point resulting in a false breakout.
Novice traders will often panic and sell when a throwback occurs, even if the breakout occurred on increasing volume signaling that the throwback was likely a temporary retracement before a continue move higher. That said, traders should have a sell point or stop loss where they will exit if the breakout does indeed turn out to be false.
Example of a Throwback in a Stock
The chart of Alibaba Group Holdings Ltd. (BABA) shows a level of resistance near $82.
The price popped above the prior high on attempt one but failed to make further upward progress. The same thing happened at attempt two. Following attempt two, though, the price was able to continue making upward progress above the resistance area.
Following the initial move higher the price had a throwback toward $82 before continuing to move higher.
While volume can often be of help, on this example the actual breakout was surrounded by a high volume failed breakout (attempt one) and a high volume earnings release shortly after the breakout. If looking closely though, the breakout at attempt two and the rally that succeeded moving higher shortly after were also on slightly elevated volume.
The Difference Between a Throwback and Fibonacci Retracements
A throwback is a general type of price retracement following a breakout. Fibonacci retracement levels are areas where the price could retrace to following a price move. A Fibonacci retracement is a percentage of the preceding move, with the percentage based Fibonacci mathematics.
Limitations of Using the Throwback
A throwback is a type of price action that may follow a breakout. Trying to trade it is where some traders may fall into trouble.
The appearance of a throwback following a high volume breakout won't always mean the price will head higher after the throwback is complete. A false breakout could follow a throwback, meaning buying on the breakout or throwback could result in a loss.
A throwback can provide an opportunity to enter a trade if the initial breakout trade was missed. Some traders prefer this entry. Although, there is a danger of also missing this second entry opportunity if the price doesn't throwback or it doesn't throwback far enough toward the resistance level to signal the trader into a trade.