How often has it happened to you that you are watching a certain level and waiting for its breakout, and when the price breaks this important level, the price does not trend towards the breakout? The value will then drop and your balance will be at risk of losing a large amount of money. Now let's talk about what is a fake breakout specifically in the crypto market.
Definition and types 📝
A false breakout is a horizontal or sloping level breakout after which the price quickly or gradually moves away in the opposite direction of the breakout. A candlestick that breaks out of a level is called a breakout candlestick.
The most common false breakouts in trading:
- False breakout of the trend line.
- False breakout of support or resistance.
- A breakout that falsifies the boundaries of a technical pattern.
Now that we have a complete layout of possible breakouts, let's take a closer look at them. In the breakout explanation, we will quickly explain the trading principle of this pattern.
fake trend breakout 📊
In the chart of
ETHUSD
I was able to find some great false trend breakouts during bull markets. What mattered was that the price started to rise significantly, a trend line was formed, from which most traders bought the asset, and all buyers were thrown off the train. But for others who understand the principle of false breakouts, on the contrary, it was a great opportunity to enter the market.
We see excellent trend breakouts, well-defined breakout candlesticks. Here the trader has his two options.
1. Enter in the direction of the trend. Since the price broke through the trend line, the trend changed to a downtrend.
2. Wait for a possible rebound and go back above the trend line.
Let's start with the fact that it is not profitable to enter a trade immediately after a trend breakout, since such confusing cases are likely to occur. Therefore, we recommend waiting for a strong rebound and a continuation of the move in the direction of a breakout. And what to do if the market is in the situation shown in the diagram, that is, the price breaks through the trend line and goes back up again? Everything is even simpler here.
- Wait for a return above the trend line.
- As soon as that happens, place a limit order on the upper or lower limit of the breakout candlestick (depending on the direction of the trend).
- Wait for the market to fill your order.
- Place your stop loss below or above the trend line (depending on the direction of the trend).
False breakout of support or resistance 📈📉
This type of breakout is the most popular, but it has its own interesting tricks. As a rule, in such a situation, the price chart suggests that it wants to break through some important level, and all traders freeze, waiting for its breakout. A breakout will occur, but no profit will be made. This is the current reality, at least the classic one in the cryptocurrency market.
The principles of trade entry are exactly the same. Only the nature of the breakout is different. By the way, as you can see in the post and on the coin's chart, the biggest and strongest moves are usually preceded by a false breakout. This is due to the fact that most panic traders or traders with extremely short stop losses end up losing out thanks to false breakouts.
False breakout of the pattern 🔎
This false breakout is the rarest, but it still happens. Its essence is that if you look at one of the numbers in technical analysis and understand in which direction this number is most likely to break according to its own rules, then the number will break in the opposite direction .
in
SolUSDT
I was able to find a good example of this algorithm in the chart. The chart clearly depicts a descending triangle with a flat bottom, and according to classic technical analysis it should break towards the flat side, but they give us a “haircut” I decided to.
The algorithm participating in the trade is exactly the same as in the other two cases. But here, in addition to overcoming the top or bottom of the breakout candlestick, you can rely on one more entry variation. Also, for classic technical analysis patterns, you only need to enter a trade at the cross of the pattern.
In the cryptocurrency market, the following situations often occur:
• Critical levels are formed.
• Price automatically corrects above or below it.
• With a small continuation of movement in the opposite direction, there is a pullback to the previous zone (pseudo-breakout).
• Price returns to this zone and begins to consolidate.
• A true breakout occurs.
As a result, stops were accumulated for both those who did not make money on short positions and those who did not make money on long positions. He has only one recommendation to avoid this case. Tighten the stopper firmly and don't be greedy. Remember the main rule: The more tests you have on a level, the more likely you are to break through. And here's another simple truth. The point is that levels are created to beat levels.
The conclusion is, false breakouts are a common phenomenon in trading, especially in the cryptocurrency market. These can come in many forms, including false trend breakouts, false support or resistance breakouts, and false breakouts of technical patterns. By understanding these scenarios and applying appropriate trading strategies, you may be able to take advantage of market opportunities. Recognizing and managing false breakouts can contribute to a more successful trading experience.
Dear traders, if you liked this educational post 🎓, please give it a boost 🚀 and leave a comment
