False breakouts are one of the most common occurrences in the forex market. These are price movements that appear to be a breakout of a support or resistance level, but then reverse and return back to the previous range. False breakouts are frustrating for traders because they can lead to losing trades and missed opportunities. In this article, we will discuss false breakouts, how to identify them, and how to trade them.
What are False Breakouts?
A false breakout is a price movement that appears to break a support or resistance level but then quickly reverses back into the range. False breakouts occur when there is a lack of buying or selling pressure to sustain the breakout. Traders who enter a trade on the breakout will quickly find themselves in a losing position as the price returns to the previous range.
False breakouts can occur in any market, but they are particularly common in the forex market. This is because the forex market is decentralized, meaning that there is no central exchange. As a result, there are often discrepancies in pricing between different brokers. These discrepancies can lead to false breakouts.
Identifying False Breakouts
Identifying false breakouts can be challenging, but there are a few key indicators that traders can look for. First, traders could look for a strong price rejection at the support or resistance level. This means that the price moves towards the level, but then quickly reverses without breaking through.
Second, traders could look for a lack of volume or momentum. If the price is moving towards a support or resistance level, but there is no increase in volume or momentum, then it is likely a false breakout.
Finally, traders could look for a retest of the support or resistance level. If the price breaks through a level and then immediately returns to retest it, this is a strong indication that it was a false breakout.
Trading False Breakouts
Trading false breakouts can be challenging, but there are a few strategies that traders can use. One strategy is to wait for a retest of the support or resistance level before entering a trade. If the price breaks through the level and then immediately returns to retest it, traders can enter a trade in the opposite direction.
Another strategy is to use a stop loss order. If a trader enters a trade on a breakout, they can place a stop loss order just below the support or resistance level. This will limit their losses in the event of a false breakout.
Finally, traders can use technical indicators to confirm a breakout. For example, traders can use the Relative Strength Index (RSI) to confirm a breakout. If the RSI is trending upwards and the price breaks through a resistance level, this is a strong indication that it could be a genuine breakout.
Conclusion
False breakouts are a common occurrence in the forex market. They can be frustrating for traders because they can lead to losing trades and missed opportunities. Traders can identify false breakouts by looking for a strong price rejection, a lack of volume or momentum, and a retest of the support or resistance level. To trade false breakouts, traders can wait for a retest of the level, use a stop loss order, or use technical indicators to confirm a breakout. By understanding false breakouts and how to trade them, traders can improve their chances of success in the forex market.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
