False breakout of the exchange level (failed breakout)
What is a false breakdown on ?
False breakout (failed breakout) - is a market situation in which there is a return of the price below (above) the level of resistance (support) after the fixation of the candle above (below) it. In simple words - the price breaks through a significant technical level (line), exiting the channel, and then returns to the channel.
False breakthroughs especially characteristic of a long sideways market, as well as of a strong volatility during important macroeconomic events in a developed trend channel.
Types of false breakdowns
In the foreign exchange market it is customary to divide false breakdown levels into the following types:
- Classic bull and bear trap at key support/resistance levels
A bull or bear trap is usually a pattern consisting of 1-4 barsThe market is not a false breakout at any key level. Such a false breakout occurs after a large directional movement of the market approaching a strong key level. Most traders in these situations tend to believe that the level will be broken just because the market is approaching it very strongly and aggressively, and begin buying or selling only to be "fooled" by the market a short time later by a bullish or bearish trap.
- False break of the consolidating market
False break of the consolidating market or sidebar - This is a very common phenomenon. It is very easy to fall into the trap of thinking the market has moved out of a ranger by forming a breakout, only to see it move back into a sideways position. The easiest and most effective way to avoid this trap is to simply wait until the daily chart clearly shows that the market has moved out of the consolidation zone. You can then proceed to look for Price Action signals and make trades in the direction of the breakdown.
- Fakes (false breakdown of the internal bar)
Fakes is one of the most complex Price Action patterns, the ability to work with it will allow you to understand the market dynamics much better. Essentially, Fakes is a pattern that occurs when an inside bar is formed. Accordingly, if you have a formed inside bar, you can begin to track the appearance of a false breakout of the inside bar and the mother candle.
How do I detect a false breakdown?
In order to identify a false level breakout, you should know the potential place where it could happen. As a rule of thumb, a potential false breakout occurs at resistance or support levels that are created with trend lines, or chart patternsor lows/maxims formed 1 day prior to this event.
Determining a false breakout level on , you should always remember that between the price and the trend line there must be a certain distance. When there is a gap between these lines, it means that price is moving in the direction of the trend, but it is moving away from the trend line.
Another important factor influencing the false breakout of a level is price movement speed. If the price speed is like a crawling snail, a false breakout is more likely. And when price is approaching our trend line at a brisk pace, a successful breakout may occur. When price is moving rapidly, momentum can take it beyond the trend line. In such situations, it is better to refuse to determine the moment of breakout.
To avoid getting into a false breakout, you should clearly understand its difference with the real breakout:
- A false-break is a temporary price movement during which it is able to break an important technical level and immediately start moving back in the opposite direction.
- In a true breakout, the price will not return to the broken level, or it will "try" it, rebound and continue moving.
There are several ways to detect a false level breakout:
- If you monitor the volumes, you can find some connection between their growth and the success of the breakthrough.
- If the market demand for any currency is greater than the supply, and at this point there is a breakout of the level, then the success of this breakout has a great chance.
How to trade level breakdowns?
There are a few key points to be aware of when trading breakout levels:
- Timeframe
For intraday timeframes (1 minute, 5 minutes, 15 minutes, etc.) there is no point in trading a false breakout. For there we can observe only chaos and market noise. It is recommended to monitor the breakdowns, at least starting from the one-hour price chart.
- The significance of the price level
The general rule is simple - the longer the price forms a level (no matter what - horizontal, sloping, trend line), the more important it is.
- False breakdowns, slightly more than true ones
That is, more often than not, the price will bounce (albeit briefly) from the level than break it. False breakdowns are observed in about 53-55% cases.
- Price behavior after touching the level
As a rule, if the breakout is false, the price will not go many pips in the direction of the breakout and will reverse within 1-3 trading candles.
Additionally, at the moment of breakdown, as a rule, there is a spike volatility.
In order to protect yourself from losses when trading on a level breakdown, there are classic techniques:
- Never trade against the trend
Quality reversal patterns are extremely rare, and they can't compensate for all the stop losses you get when trying to trade against a trend.
- Trade with pending orders
Pending orders It is necessary to set it at the level of the maximum or minimum of the signal candle, depending on the set-up.
- Correct Stop Loss Setting
It makes sense to place a stop loss not at a local high or low, but just above or below resistance. As a result of this method, the number of stop-losses may increase significantly, but they will be so small that they will not affect the decrease in the size of your deposit.
- Confirmation signals
You can wait for an additional confirmation signal in the form of another candle that closed in the direction of the future transaction.
The methods described above do not guarantee the complete absence of false breakdowns, but will help to significantly reduce their occurrence.
There are many trading strategies for breaking through levelsTherefore, it is very important to be able to distinguish between false and real breakdowns. You can read more about this in in this article.