Hello friends!
In this article we will talk about false breakouts and how to make money from them.
A false breakout is when the price approaches a level, pushes through it slightly, and then goes back down. This has the slang name of “stop picking,” meaning the price will trigger traders’ stop orders just below the level.
To accurately determine a breakout, you need to learn how to correctly set support or resistance levels. We carry out the level, guided by the trend change strategy. After a while, the price approaches our level again and makes a false breakout.
The first factor in false breakout trading is a quick approach to the level with large candles. This is how it differs from a regular breakout, where the price approaches gradually and with short candles.
Another prerequisite is long-term retest. This is when the price approaches the level again after a long period of time.
The third factor is the ATR passed. ATR shows the average distance an instrument moves in one day. In our case, the candle has passed more than its norm and there is not enough energy for further movement.
And another important point is that the previous candle closed far from the level.
Thus, we have collected 4 factors for false breakout trading.
In our case, you need to enter a trade above the level and only when a false breakout has already occurred. If the false breakout is small (about 2%), the stop loss is placed behind the tail of the candle. In case of a stronger breakdown, the stop loss can be set beyond the level.
Happy trading!