Wysetrade
This video discusses false breakouts and how to avoid them in trading. Waiting for a continuation pattern or a shallow pullback can confirm a real breakout. False breakouts can also be used as an advantage to take reversal trades. Trendline break entries can also have false breakouts, and waiting for a continuation pattern or using a stop loss can help avoid losses.
Navigating False Breakouts in Trading: A Comprehensive Guide
Introduction
As a trader, one of the greatest challenges you will face is navigating the dreaded false breakout. A false breakout occurs when price breaks through a key level of support or resistance, only to reverse drastically, trapping you in a losing trade. In this article, we will explore the different reasons why false breakouts occur and how you can avoid getting trapped by them.
What is a False Breakout?
To understand false breakouts, let’s first define what they are. A false breakout occurs when price breaks through a key level of support or resistance, signals a potential trend change, but then reverses drastically, causing traders to lose money.
Reasons for False Breakouts
There are three main reasons for false breakouts:
1. Simple trend following strategies: The first reason why false breakouts occur is that traders often enter through a simple trend following strategy without any other indicators to support their decision. This type of entry is considered a low-quality trade because it does not take into account other factors that could influence price movement.
2. Market manipulation by market makers: Sometimes market makers will use shady methods to manipulate price and push it slightly through key levels. This traps amateur “fomo” breakout traders who enter a trade based on this false momentum, only to have the trend reverse.
3. Trend exhaustion: When traders get into a trade close to the start of a move, this is known as a fresh trend. These fresh trends can have legs and room to move, allowing traders to capture a larger portion of the trend. However, when traders have already made their money and see potential risks, they may decide to start taking profit, causing the trend to reverse.
Ways to Get Around False Breakouts
1. Wait for a Continuation Pattern: One way to get around false breakouts is to wait for a continuation pattern to form. For example, you could wait for a descending channel pattern to form on a lower timeframe before taking a long breakout entry. If price breaks out above the pattern in the direction of the larger breakout trend, this shows that continued bullish momentum has entered the market, and the consolidation has ended.
2. Wait for a Shallow Pullback: Another way to get around false breakouts is to wait for a shallow pullback to occur. This means waiting for price to pull back immediately after it breaks through a key level, forming a candle at the resistance turning to new support. This allows new buyers to enter the market, creating continued momentum for the trend.
Using False Breakouts to Your Advantage
While false breakouts can be frustrating, they can also present an opportunity for traders to take reversal trade entries. For example, when price breaks through a key level of support or resistance, traders who immediately enter a long continuation trade would have likely placed their stop losses somewhere in that region. Once price reverses, all those stop losses get hit, triggering a massive move in the opposite direction. As a trader, you can take advantage of this momentum to enter a fresh trend trade, rather than a trend exhausted trade.
False breakouts can also occur after a trendline break. To get around trendline break false breakouts, you can look for a continuation pattern that forms after the trendline break, or wait for a shallow pullback.
Conclusion
Navigating false breakouts is a crucial skill for traders as it can prevent losses and improve trading results. By waiting for a continuation pattern to form or waiting for a shallow pullback, traders can avoid getting trapped in false breakouts. Additionally, knowing how to take advantage of false breakouts can open up opportunities for reversal trades. Remember, as a trader, you should always have a system in place that takes into account all the variables that could influence price movement.
