How to Avoid Falsa Breakouts and Breakdowns?Avoiding False Breakouts and False Breakdowns: A Guide for Traders
Have you ever seen a significant resistance level break and then opened a long trade, only for the market to make a sharp move to the downside? Or perhaps you've entered a short position after the price broke support, only to watch the market rebound?
If so, you're not alone. Many traders have fallen victim to false breakouts, so don't feel bad. Recognizing these situations can be challenging, but it's crucial to learn how to identify them.
In this article, we'll discuss false breakouts and breakdowns, and share two powerful strategies from the CRYPTOMOJO_TA team that can help you stay on the right side of the market and avoid unnecessary losses.
Understanding False Breakouts
The solution to avoiding false breakouts is quite simple: wait for the candle to close before acting on a breakout. Jumping into a trade as soon as the price breaks a key level can often lead to failure. Therefore, avoid placing entry orders above or below support and resistance levels to automatically enter a breakout. These orders can result in getting "wicked" into trades that never materialize.
The only way to successfully trade breakouts is to monitor the market closely and be prepared to act as soon as the candle closes in the breakout zone. Only then can you determine the breakout's strength.
How to Avoid a False Breakout
It can be almost impossible to tell a true breakout from a false one if you're not careful. Here are four ways to avoid falling for a failed breakout:
1. Take It Slow
One of the simplest yet most challenging ways to avoid a false breakout is simply to wait. Instead of rushing to enter a trade when the price breaks through support or resistance, take a step back. Depending on your trading style, give the market a few days to reveal whether the breakout is genuine. Often, the false breakouts will become apparent after some time.
2. Watch Your Candles
A more advanced version of waiting is to use candlestick charts to confirm the breakout. Wait until the candle closes to assess the strength of the breakout. The stronger the breakout appears, the more likely it is genuine.
Many traders lack the time to monitor their charts constantly, but with us, you can set alerts to notify you when specific market conditions are met. For a breakout, create an alert based on the candle's close price to ensure you're only entering after a true breakout.
3. Use Multiple Timeframe Analysis
Multiple timeframe analysis is an efficient way to identify potential breakouts and distinguish between genuine and false ones. Watch your chosen market across various timeframes. For instance, you might spot a potential breakout in the short term and then "zoom out" to analyze the market over a longer period, like a week or a month.
This broader perspective helps identify whether a breakout is significant in the long term or merely a short-term movement that may soon reverse.
4. Know the Usual Suspects
Some chart patterns can indicate the likelihood of a false breakout. These include ascending triangles, the head and shoulders pattern, and flag formations. Familiarizing yourself with these patterns can help you identify when a breakout is more likely to fail.
For example, ascending triangles often indicate a temporary market correction rather than a true breakout.
How to Trade a False Breakout
If you're a trader, you can use a false breakout as an opportunity to go short. Predict that the market will drop after the failed breakout and profit from the decline. Alternatively, you could hedge by opening both a long and a short position—going long in case the breakout is true, and short if it fails.
To trade a false breakout, follow these steps:
Create a live CFD trading account.
Perform technical analysis to identify potential false breakouts.
Manage your risk by using stop orders and limit orders.
Open and monitor your first trade.
How to Trade Breakouts
If you prefer to trade actual breakouts, here's how you can do it:
Create a live account or practice with a demo account.
Learn the signs of a potential breakout. You can find in-depth resources about breakouts on IG Academy to upskill yourself.
Open your first position.
Plan your exit strategy carefully, including setting stop orders and limit orders.
Take steps to manage your risk.
False Breakouts Summed Up
A false breakout occurs when the price moves beyond the normal support or resistance levels but fails to sustain the momentum, leading to a reversal. Traders may mistakenly go long during these events, only to see the price lose momentum shortly after.
You can avoid false breakouts or trade them intentionally by studying the market, learning chart patterns, analyzing timeframes, and using the right tools. With us, you can trade both breakouts and false breakouts using CFDs.
This chart is for informational purposes only.
Never Stop Learning
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