False breakdown: you'll know it by the minus
Every trader, trading in the foreign exchange market, has faced with false price breakdowns. There are several types of false price breakdowns in technical analysis. By correctly recognizing and interpreting a false price breakdown, a trader maximizes profits and reduces losses. Let's consider classic examples of false breakdowns.
False break of a key level
False breakdown of a key level occurs both in an upward and downward trend. A pattern is formed of 1-4 candlesticks, which is a confirmation that the breakout of a key level is false. As a rule, such breakdowns occur during a strong trendIn this situation, most market participants, predicting a breakout of this level, enter into an appropriate position. In this situation, most market participants, predicting a breakout of this level, enter into an appropriate position, but the price often deceives them, forming a pattern called the "bull (bear) trap.
A "bull trap" is formed during an upward price movement. Expecting a breakout of a key level, traders open buy positions in front of it. However, the price "pierces" an important level and returns under it at the expense of large sellers entering the trade, while closing purchases at the stop loss. Buyers have fallen into a "bull trap" and incurred a loss. Similarly, a "trap for bears" is formed.
False break of the flat boundaries
As a rule, after a strong movement, the price enters a consolidation phase, moving in a horizontal price channel, after which a false breakout of one of the boundaries of the consolidation zone can occur. After the price seems to have broken through a flat, the trader opens a position in the direction of the breakout, but the price returns to the previous price range, closing the open trade by a stop loss. To avoid this situation, it is recommended to wait for the price to fix under or over the broken line flytrapAnd the classic rule of technical analysis recommends waiting for the price to pull back to the technical analysis after the breakout and only enter the trade after the price rebounds from it and resumes the movement in the right direction.
False breakdown of the internal bar
Another common type of false is the breakdown of the inside bar when trading on Price Action tactics. Having formed an inside bar, you can see the appearance of a false breakdown of the inside bar and the mother candle.
False breakdownsThe following types are found on all timeframes, irrespective of their type. Their appearance is an integral part of trading on the foreign exchange market, and their timely recognition is one of the prerequisites for the trader's success.
B) Entering the market on the second market movement. Let's see how these two techniques would allow us to filter out the false breakdowns discussed earlier in the text.