Introduction
False-breakouts are exactly the same: a breakout that fails to continue beyond a level, resulting in a ‘false’ breakout of that level. False breakout patterns are one of the most important price action trading patterns to know, because false breakouts are often a very strong signal that the price is changing direction or that the trend is about to resume. A false break of a level may be considered a ‘cheat’ by the market, as it looks like the price will breakout, but then rapidly reverses, fooling everyone who took the ‘bait’ of the breakout. What often happens is that novices will enter what looks like a ‘clear’ breakout, and then professionals will push the market back the other way.
As a price action trader, you want to learn how to use them to your advantage instead of falling victim to false breakouts. Here are clear examples of false breakouts above and below key levels. Note that fake breakouts can take extraordinary forms. Sometimes the pin bar pattern comes with a false break or a false break and sometimes not:
A false breakout is a ‘contrarian’ move in the market that ‘destroys’ traders who entered based on emotions rather than logic and forward-looking thinking.
In general, false-breaks occur because amateur traders or people with ‘weak hands’ enter the market only when they ‘feel safe’ doing so. This means, they enter when the market has already moved in one direction (and is ready to pull back) or when they try to ‘anticipate’ a breakout from a key support or resistance level. Are. Professional traders keep an eye out for these mistakes of amateurs and the end result is a very good entry for them with a tight stop loss and great risk reward potential.
It takes discipline and a bit of ‘gut feeling’ to know when a mis-brake is likely, and you never know for sure until it happens. The important thing is to know what they look like and how to trade them, which we will discuss further…
How to trade false breakout
False breaks occur in all market conditions; Trending, consolidating, counter-trending, but perhaps the best way to trade them is to follow the major daily chart trend, as we see in the chart below.
Remember, in the chart below, we had a clear downtrend and several false breakouts to the upside within that trend. When you see a false breakout against a major trend like this, it is a good sign that the trend is ready to resume. Amateur traders like to try to pick a bottom in a downtrend or a top in an uptrend and this can lead to false breakouts against the trend as we can see below. On each of these false breaks in the chart below, amateur traders thought the downtrend was over and so they started buying, once this buying started the traders came back and gained temporary strength in the down-trend. took advantage. The market entered below the price, and then the downtrend resumed, taking out all the amateur traders who had tried to move lower.
The chart below shows examples of false breakouts in down-trending markets. Note that everyone has started this trend again…
False-breaks are prevalent in trading ranges as traders often try to breakout from the range but usually the price remains range bound for longer than most anticipated. Knowing that false breaks are somewhat common when the market reaches a trading range is very valuable information for the price action trader.
Trading in range bound markets can be very profitable as you can wait for price action signals at the support or resistance range and trade on the other side of the range.
The best way to ensure that you don’t get caught in a false breakout from a trading range is to wait for the price to close outside the range for two days or more. If this happens, there is a good chance that the range will be filled and the price will start rising again.
In the chart below, we will see how a rate movement dealer can use the fake breakout pin bar sign to alternate fake breakouts of buy and sell ranges. Trading Range Also note the false break pin bar at key resistance and two false breaks at trading range support. More experienced traders can also trade false breakouts which do not trigger price action such as pin bars. The two false breaks of support in the chart below are potential buy signals for the savvy price action trader…
False breakout patterns can sometimes indicate the beginning of a new trend and the end of an existing trend.
In the chart example below, we can see a key resistance level holding the price on two tests, then on the third test, the price formed a large false-break pin bar strategy that signals a potential downside.
As we can see in this chart, the false breakout not only signaled the bottom but started the entire downtrend…
False Breakout Pattern Trading Tips
- False breakouts arise in trending markets, range-sure markets, and in opposition to the trend. Pay attention to them in all market conditions as they often provide strong indications of impending market direction.
- Trend counter-trend is difficult, but one of the ‘best’ ways to trade against the trend is to wait for a clear false breakout signal against the trend from key support or resistance levels, as shown in the last example above.
Frequently Asked Questions (FAQs)
How do I distinguish a genuine breakout?
Understand the key indicators and patterns that signify a genuine breakout, ensuring you don’t fall for deceptive market movements.
Can automated tools help spot fake breakouts?
Explore the role of automation in breakout detection and the limitations of relying solely on automated tools.
What role does market sentiment play?
Delve into the impact of market sentiment on breakouts and how understanding the collective mood can enhance your analysis.
How often do fake breakouts occur?
Gain insights into the frequency of fake breakouts, allowing you to approach the markets with a realistic perspective.
Is it possible to recover from trading losses?
Discover strategies for recovering from losses and building resilience in the face of market challenges.
How can beginners avoid falling for fake breakouts?
Get valuable tips for beginners to navigate the complexities of the market and avoid the pitfalls of fake breakouts.
