How to spot False Breakouts

23 Dec

  Breakout trading has become popular as traders await many pairs to breakout from their consolidating ranges. Trading a breakout strategy is fairly straight forward; traders will look to buy a breakout of price above resistance or sell as price breaks through support. However, there is one question on the back of everyone’s mind. How can I avoid false breakouts?

A false breakout occurs when prices moves through a support or resistance level and proceeds to immediately move in the opposing direction.As a trader, you must be familiar with how to identify a false breakout over a legitimate break out. Many traders try and force trend entries when a breakout occurs even though the market has no intention of honoring that breakout.

Breakout trap

It’s time that you come to grips and learn how to tell if a breakout is real or if you should fade the breakout and take advantage of the great risk: reward ratios that are available when you notice a false breakout.

What are false Forex breakouts?

In general, false breakouts are the movement of a price which looks like a start of a new trend but instead of continuing the movement in the direction, it reverses and moves back in the opposite direction. In the case of trading Forex breakouts, a false Forex breakout may leads traders to enter a trade assuming that the price has break through a trend line and will continue to run in the same direction. However after entering the trade, traders would find the price moving back, turning your profit into losses within a short while.

false breakouts

The SPEED of price movement is also very important.

If price is inching like a caterpillar towards the trend line, a false breakout may be likely. However, a fast price movement towards the trend line could prove to be a successful breakout. With a high price movement speed, momentum can carry price past the trend line and beyond. In this situation, it is better to step back from fading the breakout.

clean breakout

Two common patterns where false breakouts tend to occur are:

  • Head and Shoulders
  • Double Top/Bottom

In summary, breakout trading is a very popular strategy for approaching Forex. Breakouts occur frequently on currency charts. Whether these breakouts are real or false, however, is the difficulty in implementing this methodology. With the suggestions I give you today, I am sure you already have a better understanding on how to trade Forex breakouts.

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