In this tutorial, I'll write about how to recognize false breakouts.
For a start, let's discuss what a breakout is.
When the market gets to previous highs or previous lows it’s a good opportunity to make a low-risk, high-reward trade as prices tend to bounce off the support and resistance levels.
However, this doesn’t work all the time. Otherwise, there would be no winning trades. Sometimes the price breaks through the barriers, and that’s an even better opportunity to make an exceptional profit.
There are plenty of false breakouts. What seems to be a new trend may reverse. That is why good entry points are very important, but recognizing the trend is what separates a good trade from bad one.
How to recognize a false breakout? If the market stabilizes with a double low, it may be a false break. The price may cross the psychological resistance or support barrier, but then it would push back to the range it was before.
Then it breaks below - maybe the price will start trading low. The market reverses really quickly. We can take a stop loss at this low.
False breakouts could give you a great opportunity to make more money, as you can realize your previously planned strategy at a better price.
Here's an example. I'm trading BTCCNY. At this chart, each candle represents a 15 minutes worth of trading.
As I was hunting for a good opportunity for a low-risk-high-reward trade on BTCCNY. I've set the resistance level at ¥28076, which seems to be quite established level. I want to open a short position as soon as the price approaches it, and set the stop loss slightly above.
The market was nudging the support level, and at the moment we are discussing I could see that the price has not only approached it but broke through. Should I change my strategy and buy? I decide to wait for a confirmation.
Let's take a look at what happened next. The moment discussed above is now marked with the cursor. There were two false breaks, and one more rally before the market bounced off the resistance level and went down. I was able to make a profit on my short position with a relatively low-risk decision.
Using a setup of a false breakout can give you an excellent trading opportunity. However, you have to know, it doesn’t work all the time. You need to be disciplined with your stop loss, you do not want to be in a trend that suddenly falls.