How to Avoid False Breakout ?
Updated
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Have you ever seen a key resistance level breached and entered a long position right before the market turns the other way and dumps hard?
Have you watched the price smash through support, and entered into a short position only to watch the market bounce?
Don’t feel bad, this has happened to everyone – you’re just one of many victims of the false breakout, and learning to spot these things can be tricky.
Read on as we discuss breakouts, and fakeouts and introduce two powerful indicators from the CRYPTOMOJO_TA team that can help you stay on the right side of the market and avoid further pain.
The solution to this problem is actually pretty simple (as depicted above). Rather than act on trade in real-time as soon as the price breaks a key level, we should wait until the candle closes to confirm the breakout’s strength. So the idea of setting entry orders above or below support or resistance levels to automatically get us into a breakout trade is not a very good one. Entry orders allow us to get “wicked” into breakout trades that never actually materialize.
On the surface, this would lead us to believe that the only way to effectively trade breakouts, is to be at our trading terminals ready to act as soon as the candle closes in breakout territory. Once the candle closes, we can then open our position that hopefully has a higher chance of success.
Consider following me for the latest updates and Long /Short calls on almost every exchange.
I post short mid and long-term trade setups too.
Have you ever seen a key resistance level breached and entered a long position right before the market turns the other way and dumps hard?
Have you watched the price smash through support, and entered into a short position only to watch the market bounce?
Don’t feel bad, this has happened to everyone – you’re just one of many victims of the false breakout, and learning to spot these things can be tricky.
Read on as we discuss breakouts, and fakeouts and introduce two powerful indicators from the CRYPTOMOJO_TA team that can help you stay on the right side of the market and avoid further pain.
The solution to this problem is actually pretty simple (as depicted above). Rather than act on trade in real-time as soon as the price breaks a key level, we should wait until the candle closes to confirm the breakout’s strength. So the idea of setting entry orders above or below support or resistance levels to automatically get us into a breakout trade is not a very good one. Entry orders allow us to get “wicked” into breakout trades that never actually materialize.
On the surface, this would lead us to believe that the only way to effectively trade breakouts, is to be at our trading terminals ready to act as soon as the candle closes in breakout territory. Once the candle closes, we can then open our position that hopefully has a higher chance of success.
Note
Fake-out Trading:
Fake-out trading simply means trading in the opposite direction of the breakout fake out trading=trading false breakout.
You would trade fake out if you believe that a breakout from support or resistance level is false and unable to keep moving in the same direction. Fake trading is a great short-term strategy so if you are a long-term trader avoid that.
Trading breakout appears to independent traders because of greedy mentalities they believe in trading in the direction of the breakout. They believe in huge gains on huge moves. Catch the big fish, forget the small fries.
The institutional trade prefers to fake out trading as we know to sell sometime, there must be a buyer.
Note
Best for indicators that every new trader needs to know
>Moving average convergence/divergence (MACD) is a popular tool for evaluating price changes that take place quickly, which helps traders understand the momentum behind a breakout. Through the use of a histogram, traders can see the speed of price changes as price movements approach a line of resistance and break above. With MACD, studious traders can even spot likely breakouts before the price touches the line of resistance based on the rate of acceleration for the currency pair.
In addition to helping spot a price breakout, MACD can also help traders figure out when to close their position based on slowing momentum, which may indicate an oncoming price reversal. As the histogram used to track momentum starts to plateau or even indicates a reversal, traders should consider placing a stop-loss order or closing out their position altogether to maximize their earnings through this swing in momentum.
>Bollinger Bands are composed of three lines: the 20-day simple moving average (SMA) and parallel lines that represent two standard deviations in either direction from the SMA. Traders use these outer bands to identify price extremes that are likely to lead to a reversal breakout. When the price moves outside of either of these outer bands, it is regarded as an extreme price position that is likely to trigger a reversal breakout.
Traders can use Bollinger Bands by simply opening a position on a currency pair whenever the price crosses one of these bands. To gauge the possible momentum for this breakout, you might consider using MACD or the relative strength index (RSI) in conjunction with Bollinger Bands.
>The RSI is a simple technical indicator that is nonetheless relevant when you’re evaluating a potential forex breakout. The RSI uses a 100-point scale to analyze purchasing trends and determine whether conditions for a currency pair are overbought or oversold.
When overbought or oversold conditions develop, it offers a strong indication that a price reversal is about to take place, which can alert traders to potential reversal breakouts resulting from a market correction. When the RSI dips below 30, for example, a forex pair is generally considered to be oversold, and it can signal an oncoming surge in demand for that forex pair—which can lead to a price breakout.
Similarly, if the RSI for a pair is above 70, conditions are considered overbought, and a price decline is likely. The closer the RSI is to either extreme, the more likely it is that you will see a market correction.
>Trading volume is a measure of how much a given financial asset has traded in a period of time. For stocks, volume is measured in the number of shares traded. For futures and options, volume is based on how many contracts have changed hands. Traders look to volume to determine liquidity and combine changes in volume with technical indicators to make trading decisions.
Looking at volume patterns over time can help get a sense of the strength of conviction behind advances and declines in specific stocks and entire markets. The same is true for options traders, as trading volume is an indicator of an option’s current interest. In fact, volume plays an important role in technical analysis and features prominently among some key technical indicators.
KEY TAKEAWAYS
Volume measures the number of shares traded in a stock or contracts traded in futures or options.
Volume can indicate market strength, as rising markets on increasing volume are typically viewed as strong and healthy.
When prices fall on increasing volume, the trend is gathering strength to the downside.
When prices reach new highs (or no lows) on decreasing volume, watch out—a reversal might be taking shape.
The on-balance volume (OBV) and the Klinger oscillator are examples of charting tools that are based on volume.
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