What is a false breakout?
False breakout is a situation on an asset's chart where buyers or sellers manage to break through a strong level, but fail to hold above it, after which the price reverses.
Often, false breakouts have two reasons, namely:
🐾 market panic at highs and lows;
🐾 price manipulations by market makers.
Identifying market panic is much easier than manipulations. It often occurs at extremes - at trend highs or lows. At such moments, beginners, and even some experienced traders, often succumb to FOMO, excitement, and hope that the price will continue to move in the desired direction. In such cases, candles on hourly and four-hour charts fail to close above the reached level and form tails.
The situation with market makers can arise at any time and at any point in the trend, so it poses a particular danger. If large participants want to gather cheap contracts or "shake out the weak hands", a false breakout is depicted on the chart.
Usually, market makers collect profits near levels where the majority of stop orders are placed. In simpler terms, they liquidate positions, gathering liquidity.
A false breakout can always be identified by one key factor - low trading volume. If a trader sees an impulse but the volume indicator is at low values, they have two options - either not to enter a trade or to open a trade in the opposite direction of the impulse.
