How to Find Fake Breakout
By : Tutor Age
False Breakouts
A false breakout happens when the price extends beyond
the consolidation range and closes outside it, but fails to
sustain the breakout direction. Instead, the price retreats
back inside the consolidation range.
A sound approach to entering a breakout trade involves
waiting for the price to retrace to the initial breakout level.
Then, observe if it rebounds to establish a new high or low,
depending on your trading direction.
False Breakouts
Another strategy to counter false breakouts is to refrain
from immediately acting on the first breakout signal. By
exercising patience and confirming the price's continued
movement in your desired direction, you enhance the
probability of executing a profitable trade.
However, the drawback of this method is the potential to
forego trades where the price swiftly progresses without
pausing.
False Breakouts
How to Detect Fakeouts
To identify a fakeout, it's crucial to initially recognize a
breakout. A fakeout essentially represents an unsuccessful
breakout attempt. Similar to breakouts, fakeouts commonly
occur at support and resistance levels, trendlines,
Fibonacci retracements, channels, and chart patterns.
Breakouts hold significant popularity among forex traders.
When the price ultimately "breaks" out of a support or
resistance level, traders anticipate the price to continue
moving in the direction of the breakout.
How to Detect Fakeouts
Example
How to Detect Fakeouts
The magenta line represents the neckline of the pattern,
serving as the signal line. Within the red circle, an upward
breakout is observed through the neckline of the pattern.
This breakout confirms the presence of the Inverted Head
and Shoulders pattern, indicating a robust bullish potential
on the chart. However, the bullish breakout is swiftly
rejected by the price action.
How to Detect Fakeouts
The price sharply reverses, initiating a bearish movement
nearly equivalent in size to the Inverted Head and
Shoulders pattern. Consequently, we classify the breakout
observed in the red circle as a false breakout, commonly
referred to as a fakeout.
It's essential to remember that support and resistance
levels denote areas where a predictable price response can
typically be anticipated.
Fade the Breakout
Fading breakouts involves trading in the direction opposite
to the breakout.
Fading breakouts = trading FALSE breakouts.
Fade the Breakout
Fading a breakout occurs when you doubt the validity of a
breakout from a support or resistance level, believing it
cannot sustain its direction. When a significant support or
resistance level is breached, fading breakouts may be a
wiser strategy compared to trading the breakout.
It's important to note that fading breakouts is often an
effective short-term tactic. Initially, breakouts frequently
falter, but they may eventually succeed.
Fade the Breakout
Support and resistance levels are traditionally viewed as price
floors and ceilings. If these levels are breached, one typically
anticipates the price to proceed in the direction of the
breakout.
When a support level is breached, it suggests a prevailing
downward price trend, with more inclination towards selling
rather than buying. Conversely, if a resistance level is
surpassed, it signals a belief among traders that prices may
ascend further, leading to a tendency to buy rather than sell.
Fade the Breakout
Retail traders often favor trading breakouts, while the more
seasoned institutional traders prefer fading breakouts. The
astute forex traders capitalize on the collective sentiment of
the crowd or inexperienced traders, profiting at their expense.
Consequently, aligning with the strategies of experienced forex
traders can prove highly lucrative.
How to Trade Fakeouts
To successfully fade breakouts, it's essential to identify
potential areas where fakeouts might occur. These fakeout
zones typically emerge at support and resistance levels
established by trendlines, chart patterns, or prior daily highs or
lows.
End of Chapter
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