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Trade Less, But Wisely; Get Rich Step by Step
Master The Art of Trading
False Breakout Trading Strategy
As the name suggests, false breakout is a breakout which has failed to continue beyond a certain level, resulting in a 'false' breakout for that level. A trader should be aware and should learn false breakout patterns because they offer strong clues about whether price might be changing direction or resuming the trend soon. A false breakout of a level can be a thought of as a 'deception' by the market, because it looks like price will breakout, but it quickly reverses, deceiving all those who have been tempted to take advantage of breakout. Many a times, amateurs will enter the trade considering obvious breakout, but the professional traders will push the market back the other way.
A price action trader should learn how to take advantage of such false breakout rather than becoming victim. It should be noted that false breakout can take different forms. Sometimes a false breakout will occur with a pin bar pattern or a fakey pattern as the false break, and sometime not.
A false breakout is essentially a contrarian move in the market which flushes out those traders who may have entered on emotions instead of using logic and forward thinking.
False breakout occurs when amateur traders tend to enter the market during the period when market is already quite extended in one direction (and it's about ready to retrace) or when they predict a breakout from a key support or resistance level too early. Professional traders observe these misjudged steps of amateurs, and at the end get a very good entry with tight stop loss and huge risk reward potentiality. This requires utmost discipline and a bit of gut feel to know when a false breakout is likely to occur, because in fact, you can never now perfectly until after one has formed.
How to Trade False Breakout
False breakout occur in all types of market, whether it is trending or counter-trending. But it is ideal to trade false breakout when market is in-line with a dominant trend in daily chart.
Watch the Chart beside. You will find a clear downtrend in place and multiple false breakouts to the upside within the trend. When a false breakout occurs against the dominant trend, it is usually a very good signal that the trend is ready to resume. When amateur traders are tempted to pick the bottom in a downtrend or top in an uptrend, and professional traders takes the advantage of the dominant trend with fresh entry, such false breakouts occur. Amateur traders thought that the downtrend is over and so they started buying, once this buying started professional traders came back in and took the advantage of the temporary strength and enter into short trade, and in result the downtrend resumed, flushing out all amateur traders.
False breakout are mostly prevalent in trading ranges because traders often try to pick the trade at breakout assuming that price stays range bound for longer period. The best way to be sure you do not caught in a false breakout from a trading range is to wait for price to close outside the range for two days or more. If this happens, the range gets finished and price will again start trending.
Watch the chart - 4 below and learn how a price action trader can use a false breakout pin bar signal to trade. There is a false breakout pin bar at the key level of resistance when market is trading in range. Also there are two false breakouts at the key level of support. The two false breakouts at the support level were potential buy signals for the traders who had practical knowledge of trading.
Sometimes, false breakouts signal the end of the current trend and beginning of the new trend. Chart - 5 is the example of such a signal. Here price tested a key resistance level two times, then on the third test, price created a false-break pin bar which signaled the potentiality of coming downtrend. Besides signaling down move, it kicked off an entire downtrend.
False Breakout Pattern Trading Tips
False breakouts occur in trending markets, range bound markets and also against the trend. They should be watched carefully because they often give strong clues about the future course of market direction.
Trading counter-trend is difficult, but as shown and explained above in chart -5, one of the best way to trade against the trend is to wait for a clear false breakout signal occurred against the trend from a key support or resistance level.
False breakouts gives us a window from where you can peep into the battle between amateur and professional traders. If you are amateur trader and want to be a professional trader, you should watch, identify, learn and experience false breakouts and then your trading will take you on a different light for you.
Price Action Trading Strategies
In price action trading, traders use raw price data to analyze and anticipate fure price movement of financial markets. Price action trading strategy is based on logic and simplicity, removing all external noise including news, economics and fundamental data.
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As the name suggests, false breakout is a breakout which has failed to continue beyond a certain level, resulting in a 'false' breakout for that level.....
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