Fake Breakouts

A Wealth of Knowledge

Yonela Ngulugulu 22 Sep 2017

Market whipsaws, how fake breakouts can lead on a trader such that they may end up taking trades in the wrong direction...


Fake breakouts refer to a phenomenon where a level of support or resistance appears to be broken, however, then the market reverses and moves the opposite direction. So the market rallies towards a level of resistance for instance then bridges through that level which then will lead to a lot of breakout traders buying the market as the resistance looks to be broken, however, sooner all traders who bought on that regard find out the-the hard way that the market was only testing the level. Which is why we call this phenomenon a "fake breakout, fake-out". The purpose of this article is to allude an alternative one can opt for instead of trading breakouts.

If a beginner trader was to go to the internet and search for trading systems, the first thing they are most likely to find is "the breakout strategy" Not a lot of traders can trade breakouts successfully as most of them may appear as breakouts at face value but seemingly later one would find that it was not a breakout. Such trading leads to a low win ratio and a high loss ratio. As it is not a good system, to begin with. Understanding how breakout setups have the propensity to create whipsaws (False breakouts) requires a clear understanding of how support and resistance works. Firstly it is important to understand that support and resistance are not certain price levels meaning price level; 1.97890 or price 0.89550 or anything of that sort for that matter. These levels are zones, meaning one should not be expecting prices to reversal at a certain price precisely but it should be a way of measuring the market to say that around a certain area i will be expecting a reversal but it is never one price level. Some trading book once used a "beer belly" to allude this matter. Some people may find this example a bit inappropriate but please bear with us as the illustration we ought to make is a clear one. So, for instance, take someone's beer belly. it is no shock that if we were to get different people to push as far back against a beer belly as they possibly could. They will eventually reach a point of resistance. So one may push only up to a certain point whereas the next person may push up to a different point. This is sort of how support and resistance work. One should not expect prices to reverse precisely at a certain price level, but rather they should use that price level as some sort of a measurement, to say that anywhere around price level XYZ I am expecting prices to reverse.In fact, in most cases, traders will draw zones. This is much better as zones do not refer to a specific level but an area in the chart which could be 10 to 20 pips wide. So now one would understand why the market will reverse at one price but then reverse at another price which is more or less the same as the previous one. This is because these levels are not specific to a certain price but are rather zones or areas. So if price reverses at price level 13.0000 for instance, the next time around it may reverse at 12.9900 for example. This analogy is the same as that of the beer belly, where different people if were to push as far as they can they will reach a point where they cant push any further, this will vary from person to person.

Fake breakout in play

Now that you understand that these levels are zones, now let us look at fake breakouts in the actual charts. As already stated above, fake breakouts are when the market bridges through a level which will then give the impression that the market is now breaking that level of support or resistance. This is where a number of breakout traders get in on the market and take a trade anticipating that the market is going to completely break a level and continue in that direction. Thereafter sooner or later the market reverses and stop all of them out of their trades. This is happened to a number of traders from time to time which is the reason why we felt we should write an article on such a topic. For instance look at EUR/AUD D1, observe how that level was acting as support but the market did not reverse perfectly at that level, in fact in the following occasions the market appeared as if it was breaking it at some point. Which further illustrates the point of this article. Levels of support and resistance are never specific price levels but rather zones. On the illustration, a number of breakout traders would have sold as the market formed candles that closed on the other side of the level giving the impression that the market has broken a level. Another instance would that of GBP/USD H4

False breakout
. As already said, trading breakouts will lead a low win ratio, it is very rare that a breakout trade works. In fact, this is all relative, the market


blog comments powered by Disqus