Trading false breakouts

You are recommended again and again to trade breakouts up and down. To help You accurately determine the levels of entry and effectively place the foot, there are innumerable chart patterns. Knowledge of these patterns and strategies is already commonplace among retail traders. Indeed, in most situations, strategies work - if this were not the case, then technical analysis would not work either. However, this type of predictable behavior doesn't answer the question: why is someone on the other side of the deal? Why is this someone deliberately breaking through predictable stops, knowing that the price may turn around?

The truth is that this situation actually happens regularly. It is called a false breakout and the resulting signal is often more reliable than the original breakout up or down. Today we will look at what makes up a false breakout and show you how you can turn a potentially harmful position into a profitable one.
 
Anatomy of a false breakthrough



To get a better idea of how to trade these false breakouts, first let's take a look at the anatomy of a false breakout:



There is an upward break.

The breakout fails, falling below the new support (former resistance).

As a result, short-term traders ' stops are triggered at predictable levels.

Triggering these stops causes the price to fall (similarly, the price falls after a short squeeze, since in both cases there is a mad search for buyers).

The decline slows down after the feet are reached and covered.

The fall stops and reverses after prices reach a new main support level, or the reversal is caused by a fundamental reason.





And here are the key points of truth:



The volume should confirm the affected feet.

The original graphic pattern showing the breakout is accurate.
 
Trading false breakouts

When a false breakout occurs, You are on one of two sides. Either you have been trading a breakout and are hoping to exit your position, or you are looking for an entry point after a false breakout occurs.

If you were trading a breakout and caught on the wrong side of the trade, then you should try to exit before the price hits predictable stop loss levels. This will help you avoid the slippage that can be seen in illiquid stocks when false breakouts occur. Then you can hope to re-open in the opposite direction, which implies your confidence in the falsity of the breakout (that is, that this movement is not a simple market noise).

Let's look at an example of a trading setup to illustrate how a typical trade might go:

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Figure 1

Here (Figure 1) we hope to take a short position as soon as the breakout fails. Then we would sell half of our position after the initial decline, on the upper horizontal gray line. Here you need to take some money from the table in case there is a rollback. Finally, we would sell the remainder of our position at the next major support level, indicated by the lower horizontal gray line.
 
Trading false breakouts

When a false breakout occurs, You are on one of two sides. Either you have been trading a breakout and are hoping to exit your position, or you are looking for an entry point after a false breakout occurs.

If you were trading a breakout and caught on the wrong side of the trade, then you should try to exit before the price hits predictable stop loss levels. This will help you avoid the slippage that can be seen in illiquid stocks when false breakouts occur. Then you can hope to re-open in the opposite direction, which implies your confidence in the falsity of the breakout (that is, that this movement is not a simple market noise).

Let's look at an example of a trading setup to illustrate how a typical trade might go:



Figure 1

Here (Figure 1) we hope to take a short position as soon as the breakout fails. Then we would sell half of our position after the initial decline, on the upper horizontal gray line. Here you need to take some money from the table in case there is a rollback. Finally, we would sell the remainder of our position at the next major support level, indicated by the lower horizontal gray line.
 
Ascending triangle pattern

In Figure 4, we see an example of an increasing triangle pattern that appeared on the Doral Bank(DRL) chart from November 2005 to March 2006.



Figure 4

Note that the DRL breaks out of the ascending triangle / horizontal channel formation. This turned into a failed breakout as the stock quickly and sharply fell after falling below the newly created support level. This caused a number of stops to work, which brought the price down even further, to the next main support at$10.

In both of these examples, we can see that a false breakout led to a rapid movement in the opposite direction. In the wolf wave example, we used the principles of the wolf Wave to get the exact moment of reversal. But in the ascending triangle formation, we were able to pinpoint support by looking at the next major support.

As we have seen, false breakouts can offer a trader good profit opportunities. As more and more retail traders operate the same predictable strategies, these false breakouts are likely to become more and more obvious in the market. It's important to learn how to identify them in order to save money when your breakout game becomes unsatisfactory, and enjoy the potential profit based on the predictable behavior of others.
 
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