Jul 13 2009
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forex scalping.However, false breakouts just do not happen because of the tricks big players use. They could also be the result of market running out of steam to reach higher highs and lower lows in a sustained price break.Discover a revolutionary new
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forex trading system.This can happen when there are not enough buyers in the market to sustain an upward price move or not enough sellers in the market to sustain a downward price move. Since the big players like to fade breakouts, individual traders have higher chances of success if they also fade the breakout.
Everyone wants big easy profits. Profits potential in price breakout is far higher than in a failed breakout. Fading breakouts is counterintuitive. It is not something instinctive. The question is how to identify a false breakout.
You should look for opportunities on a minimum time frame of hourly or more. False breakouts can occur anywhere on the price charts at the levels of support and resistance.
Trendlines are drawn by joining at least two extreme points of high or lows over a long period of time. The price will bounce off the trendline in a false breakout. Probability of a false breakout is higher if the trendline is at an angle or a gradient.
Usually the third or even fourth extreme point of contact on a gently sloping trendline presents a good fading opportunity. The chances of this fading breakout are more if the moving average lies slightly below the ascending trendline or slightly above the descending trendline.
The speed of price movement before the approach to the trendline should also be considered. If the prices are approaching the trendline slowly and gently, the chances of a false breakout or a trendline bounce will be much higher.
The fast and high amplitude approach will most likely result in a successful price breakout of the trendline on the other hand. There will be a sustained follow through in prices due to the high momentum. In such a case, don’t trade it as a likely false breakout.
How to trade a fading breakout? Place a limit or market entry order a few pips below a down trendline or above an up trendline. If you are an aggressive trader, you can stagger your entry orders by placing another order a few pips away from the breakout.
However, you should do it with proper money management plan. Stops should be placed at least 20-30 pips beyond the support or resistance, away from the price zone. This will make your average cost of entry more favorable for either your long position or your short position. Now there are a few chart patterns that are ideal for identifying the false breakouts. You should read the next part of this article for more on those chart patterns.
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