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- However, as all breakout traders are aware, some breakouts will not materialize and turn out to be fake or false breakouts.
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Final thoughts What is a false breakout? At times, a financial asset like currency pair, commodity, exchange-traded false breakout trading ETFand stocks trade within a narrow range. During this period, they form a parallel support and resistance level.
In this case, a trader can make money by buying at the support and shorting at the resistance. However, always, it reaches a point where the price breaks either the support or the resistance and starts a new trend. A breakout is when it does this.
However, at times, after the breakout, the price tends to reverse.
Time Frame Matters
This reversal is known as a false breakout. We also see that there were at false breakout trading three false breakouts when the channel was being formed. In the example above, the lower nnjatrader binary options breakout happened when bears found strong resistance from bulls.
Similarly, the upper false breakouts happened because there were no enough bulls to continue pushing the price higher.
I just learned about price action trading and I would look at a chart, a naked price chart. And I see the market breaks out. Strong bullish momentum. I was stubborn! I kept doing this a lot of times!
There are two primary types of a false false breakout trading Bull trap — This happens when the price crosses a key resistance and then pulls back after a short while. Bear trap — This happens in a bearish trend when the price moves below a key support and then returns to the channel.
How to identify a false breakout To be fair, identifying a false breakout is never easy.
If it was, most day traders would be able to identify it and make more money. However, there are several approaches you can use to avoid being caught-up in such a situation. While doing this may seem like a counterproductive thing to do, the reality is that it will see you avoid losing money through a false breakout.
Use False Breakouts to Your Advantage
A good example of this rule at work is shown below. Look different timeframes Another strategy of identifying a false breakout is looking at other timeframes.
Ideally, if you spot a breakout in a shorter timeframe chart like four-hours, you can extend it to daily or weekly chart and see the overall trend.
If the price breaks down in a smaller timeframe chart but not in a longer timeframe chart, you can call this a false breakout. But, on the weekly chart, we see it still in consolidation — bullish flag — after a bullish run.
Also, we see that the price is between the This can be a sign that the lower breakouts are not real. Final thoughts False breakouts happen all the time in the financial market. Unfortunately, identifying these breakouts is not an easy task. However, following the strategies we have mentioned can help you avoid making these mistakes.