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How to filter false breakouts

To trade in the Fx market is no kid’s play. It demands a detailed analysis of the price trends and the market reactions to the same. Basically, any beginner trader would need to know some trading strategies. Breakout trading strategies play an important role in technical analysis in Fx trading.

A breakout is defined as the fluctuation of the stock price beyond the ‘resistance’ or the ‘support’ trend lines. When trading decisions largely depend on these breakouts, we often tend to witness false breakouts (often referred as “fake outs” by the traders). False breakouts largely result in reversals, unlike real breakouts where the stock price moves on to the next level after the breakout.

So how can a trader figure out if the breakout is real or fake? While analysis plays a major stand here, it’s also the wisdom of the trader that matters. One should know that when the prices stay in the first level of the trend lines, a lateral trend exists for some time, which is termed as “flat”. If the stock price surges up, it breakouts the resistance line. If it slopes downwards, it breakouts the support line. The market is bullish when the breakout is on the resistance line and bearish when it is on the support line. If the breakout is real at the support line, the market turns to “bearish”. But, if the breakout is false, it goes back to the “flat” trend.

When a trader sees a false breakout scenario, he can choose to quit the trade. Alternatively, the trader can choose to trade in the opposite direction of the trend. He may choose to go bullish when it’s a false breakout at the resistance line and be bearish if the false breakout is at the support line.

To understand a false breakout, a trader must strongly understand what a real breakout is. Also, he should be able to witness the minor reversal changes that the price may show during a false breakout movement. It is more advisable to go with the direction of the trend. Many trading decisions go well with this principle. The trend always follows a straight direction, either bullish or bearish. After the breakout, till the currency shows a reversal, the breakout is understood as a real one. When the current trend shows signs of temporary halt or retraction, it may be sensed as a fake breakout.

Also, one may note that false breakouts often have lesser trading volumes. A real breakout shows a huge change in prices upwards or downwards, but a false breakout can show little change in the prices. Also, the change in the prices may not be justified by the change in market indices. While newbies in the market may not like false breakouts, trade masters like it. Real breakouts see high trade volumes when the price moves towards the trend lines. But a false breakout may see lesser volumes. Thus, breakouts are a good analytical tool for a trader to grab big opportunities in the market.

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