It is hard to tell false breakouts in forex all the time. Because no one controls the market.
But it is vital to know that before you to detect a fake out/false break you need to first properly know a breakout in previous lessons.
What are false breakouts in forex trading
A false breakout/fake out is simply a failed breakout.
Just like breakouts, fake outs also normally occur on support and resistance levels, trend lines, Fibonacci retracements, channels and chart patterns.
Price normally breaks and then suddenly reverses direction after a break.
This is the worst experience for a breakout trader that enters in a trade as soon as price breaks. shortly after your entry, you get stopped out.
For instance from the above case, if you had bought after the breakout, you would make a loss.
Breakouts give the most profit yielding set ups but sometimes you go wrong and it’s frustrating.
There are moments when you spot a breakout and it really has it all.
To your surprise, it just turns around and wipes off all your money without you even noticing.
OR every time you try to trade a breakout, it gets back on you.
Wonder why? Things happen;
So that’s why we are here to always remind you that no matter how good the setup may appear you have to plan for such uncertainties in time.
The market has no feelings!
The truth is you cannot avoid / tell false breakouts in forex completely as long as you trade breakouts but you can minimize the risk and the loss;
How to avoid/ tell False breakouts in forex
It is completely very hard to avoid fake outs all the time.
What i can guarantee you is that you can actually minimize the chances of you getting caught in a false breakout.
- Always identify the kind of market you intend to trade before taking an entry, see whether it is a choppy market or calm.
- At least wait for confluence levels; this is when of the most used indicators are pointing at one specific thing. Trade with multiple indicators to achieve this.
- In case you are sure about the breakout confirmation, always wait for a price retest after the breakout and take the second confirmation.
- And use stop losses always to limit the loss
It’s good but not enough to learn about breakout strategies because there will be times when breakouts FAIL. We have to know what to do in case of fake outs.
Let’s now see how to take opportunities in fake outs.
How do you trade fake out/ false breakouts
False breakouts occur in trending markets, range-bound markets and against the trend.
You can trade false breaks on all time frames and are best traded in the direction of the trend.
Since you already know how to trade price breakouts, then it’s easy to trade false breakouts.
As long as the pattern confirms to be a fake out, follow the same procedure as the one for trading breakouts.
In this case, we have a false break on the support zone.
So we shall instead buy on price reversal at the support. Or else,wait for price to close above the upper trend line.
Wait for the confirmation candlestick to close above the upper trend line, then buy.
At the support level, it is possible that price may retest and then break through again.
Don’t be quick to jump in.
Wait for confirmation.!!
More so, watch out for reversal candlestick patterns at resistance or support for more confirmation.
You can clearly see from the chart above,
The formation of a bullish engulfing at the support.
This gives more confirmation that the breakout may not actually occur.
How long should you hold an Open Position ?
How long you can hold an open position in forex, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer,...
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