Trade false breaks

You again and again recommend to trade breakouts up and down. To help You accurately determine the levels of entry and effectively place the foot, there are innumerable chart patterns. Knowledge of these patterns and strategies already commonplace among retail traders. Indeed, in most situations, the strategies that work - if this were not so, then technical analysis would not work. However, this type of predictable behaviour is not the answer to the question: why someone gets on the other side of the transaction? This is why someone intentionally breaks through the predictable stops, knowing that the price may turn around?
The truth is that this situation actually happens regularly. It is a false breakout and the resulting signal is often more reliable than the original breakthrough up or down. Today we will look at what is about breakthrough and show you how You can turn a potentially disastrous position into a winning one.
 
Anatomy of a false break



To get a better idea of how to trade these false breakouts, first let's look at the anatomy of a false break:



Breakout occurs to the upside.

A breakthrough fails below the new support (former resistance).

As a result, predictable levels of stop orders trigger short-term traders.

Triggering these stops causes the price to decrease (likewise the price falls after the short squeeze, since in both cases there is a frantic search for buyers).

The decline slows down after the foot is reached and covered.

Drop stops and reverses after prices reach a new major support level, or turn causes the fundamental reason.





And here are the key points of the truth:



The volume should confirm the target of the foot.

Original graphic pattern showing a breakthrough, accurate.
 
Trade false breakouts
When there is about a breakthrough, You are with one of the two parties. Or You traded the breakout and hope to get out of their position, or are You looking for a point of entry after going on about a breakthrough.
If You traded the breakout and are caught on the incorrect side of the transaction, then You should try to get out before price will hit a predictable stop-loss levels. This will help You avoid slippage, which can be observed on illiquid shares when false breakouts happen. Then You can expect to re-open in the opposite direction, which suggests Your confidence in the falsity of the breakthrough (i.e., that the movement is not a simple market noise).
Let's look at an example trade setup to illustrate what might go in a typical transaction:
Here (Fig. 1) we hope to take a short position as soon as the break will fail. Then we would sell half our position after the initial decline, the top horizontal gray line. Here you need to take some money off the table in case a rollback. Finally, we would sell the rest of our positions into the next main support level denoted by the lower horizontal gray line.
 
Other equipment



There are also some strategies that require false breakouts to establish a pattern. The most popular example of a pattern of "Wave wolf".



Here is an example of a wolf Wave:





Please note that the fifth wave pattern Wave Volf argues that there is a breakthrough followed by a strong movement in the opposite direction, to the point 6. This pattern is surprisingly accurate, and makes good use of the accuracy of the phenomenon of false break.



Examples

Let's consider some examples to reinforce these concepts.



In Figure 3 we see an example of a pattern the wave of the wolf, which appeared on the chart BASF Corporation (BASF) since the end of July 2005 until the end of October 2005.



Now, we notice that the action seemed to have broken above the upper channel, creating a new high. Then the action dropped below the breakout level, creating a false break. Using the principles of Wave wolf, connecting points 1 and 4, we can calculate that the break will end around 70$.
 
Pattern ascending triangle
In Figure 4 we see an example of a pattern ascending triangle that appeared on the chart of Doral Bank(DRL) from November 2005 to March 2006.
Please note that DRL coming from formations ascending triangle / horizontal channel. It turned into a failed breakthrough, because the action is fast and fell sharply after declining below recently established support level. This triggered a number of stops that collapsed the price even further, to the next main support at$ 10.
In both these examples we can see that the false breakthrough led to the rapid movement in the opposite direction. In the example of the wolf, we used the principles of Wave wolf to get the exact moment of reversal. But in the formation of the ascending triangle we were able to accurately determine support, looking at the next major support.
As we have seen, false breakouts can offer the trader a good money making opportunity. As more retail traders working the same predictable strategies, these false breakouts are likely to become more and more apparent in the market. It is important to learn to identify them, to save money, when Your game is on break becomes unsatisfactory, and enjoy potential profits based on the predictable behavior of others.
 
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