False Price Breakdown: Detecting and Fighting

One of the most common strategies on the breakdown trading. It would seem that there is nothing easier than to wait for the price to break through one of the significant levels and move on. The trader has only to open a trade in the direction of the trend.

Everything would be really good if it weren't for false breakdowns, which occur in half of the cases and are usually the main cause of losses.

How to deal with a false breakdown

Defining a scenario

False breakdown - is the price overcoming a certain level (boundary) with the subsequent return to the previous course.

To combat this phenomenon, it is necessary to know the whole scenario of the unfolding events.

The trader determines a level, over which the price is likely to go further, it may be the line support or resistance or other significant level. Then pending orders are placed or trades are opened in manual mode.

After a breakdown the price moves in its direction for some time, then withThe next step is a reversal and continuation of further movement in the direction of the existing trend. This, naturally, leads to the triggering of stop lots at best, and at worst, a stop out is triggered.

Methods of Fighting

1. Accurate breakdown detection - is accompanied by an increase in volumes, has a cause (the event that caused the breakdown), supported by signals from technical indicators.

2. Movement duration - If the breakthrough occurred against the movement of the main trend, its value must be greater than the maximum value of the correction on your work timeframe.

3. Overcoming lows or highs - the price overcame the price level on the older time interval. For example, during the day the maximum price for EURUSD was 1.3540. But then it breaks through and makes a new high at 1.3580, which makes it much more likely that the breakout is a true price.

4. Setting a Stop Loss - This order should be located so that it is not triggered by the correction, so it is best to set it behind the border of the price level. But the main thing is not to forget about it when placing pending orders.

5. Timeline - the longer the breakdown continues, the higher the probability of its further existence.

In addition, it should be taken into account, if the breakout occurred in the direction of the trend, which is the main for the older time intervals, the probability of its continuation increases significantly. For example, on D1 there is an uptrend, on H1 - a downtrend, the breakout occurs in the direction of price growth.

Useful articles on the topic

Leave a Reply

Back to top button