FALSE BREAK | Price Action Trading📊

14 Jul 2022

⚠️How often have you opened a key level breakout trade, and then the price turned against you? False breakout happens quite often and it is a problem for many traders who buy at highs and sell at lows.

Breakout trading is a fairly popular and viable trading strategy. However, some breakouts often turn out to be false. This can be quite frustrating, not to mention that it can often lead to a losing trade.

However, in many cases, an experienced trader can analyze the market situation and react to it accordingly. False breakouts can make a profit if you know how to trade them correctly.

❗️A false breakdown is a situation when the price violates an obvious level, but then suddenly changes direction. When the initial breakout of the level occurs, many traders open a trade in the direction of the breakdown. These traders are trapped when the price reverses, which triggers a series of stop losses. New traders are also entering the market, and this puts additional pressure on the price. This often turns the price into a new trend, the opposite of the initial breakout.

A breakout that turns out to be false is a sign of strength in a downtrend or weakness in an uptrend.

As you can see, a false breakout can easily cause significant losses for any trader.

Some traders develop their entire strategy around trading false breakouts, as this can be a very powerful trading approach. Some of the best trades happen when market players fall into a trap and their stops start to work.

✅How to find patterns of false breakouts?

🟢If you do not learn how to correctly identify false breakouts, you will not be able to trade them profitably. For example, there will be situations when the price returns to the breakout point, and only then continues its movement.

🟢One of the ways to detect false breakouts is to monitor the volume. Real breakouts are usually accompanied by strong indications of trading volume at the time of the breakout. When this volume is absent, there is a higher probability that the breakout will not happen.

🟢Thus, if the trading volume is low or it decreases during the breakout, a false breakout is likely to occur. In contrast, if the volume is large or it increases, a real breakdown is likely.

🟢It is also useful to monitor not only the trading volume but also the price movement on the lower timeframe. In many cases, you will see that the price makes a very sharp pullback on the lower timeframe, which is not visible on the higher timeframe.

✅False Breakout Trap

🟢After all, many trading textbooks say that a breakout can be considered confirmed when a candle closes above the resistance level. However, the price moves in your direction for a while and then turns 180 degrees. As a result, you have a stop loss triggered.

🟢The false breakout trap includes several candlesticks, usually 1-4, that go beyond the key support or resistance level. Such breakouts occur after a strong movement, as the market has reached an important level, but the price momentum still retains its strength.

Have you ever been trapped by a false breakout?

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