False breakouts in trader’s psychology.
Most of beginner traders have a weak point: the false breakouts. It seems like the stock or futures are ready to move on after the breakout and the trader enters into position. But suddenly the price changes the direction, knocks the stop and causes losses to trader. Well this is quite unpleasant but it doesn’t occur all the time. The traders shall change their minds a little bit and look at this situation from other side, mean from adapting side to situation, because false breakout is a good opportunity with low risk and high success.
Breakouts are one of the first strategies that traders begin to study. The idea is to catch a huge movement that would follow a pattern formation recognized by trader on the chart.
A breakout trading is a very practical strategy but you should ready in the situation when the breakouts could be false, mean the price will break the pattern and go back quickly. If you’re constantly annoyed by false breakouts then the Market might tell you something with that. So if you often lose money due to false breakouts, maybe you should join those traders who earn money from these breakouts! Wouldn’t it be great? Trading on false breakouts is a very good strategy that requires a lot of practice and quick action.
Not all breakouts are same.
False breakouts occur often on all time-frames. You shouldn’t trade on each breakout, but better trade on trend’s direction. For example you have an up-trend that forms a triangle. Well now you should open a long position because the trend tells you that the price will move up. A false breakdown would confirm this supposition; mean if the price didn’t gone to low then it will try to move up.
This is a simple strategy but requires practice and concentration. False breakouts occur quickly to attract you intro their trades. Be patient and ask yourself where is the trend going? Remember, you can trade only by trend direction. Think about the stop order, where would you place it? Where will you take the profit? Answer yourself to these questions before entering into trading.
Record this strategy in your trading plan. This is to know exactly what would you do in case of the opportunity to enter into a trade.
Pay attention to the speed and depth of the breakout. If the price is much beyond the range and then go back in the pattern’s depth, then you cannot enter into a breakout’s trade. The false breakout has to be small, with a short-term and this would allow you to enter into a trade. More than that, the return into pattern must occur abruptly.
In such type of trades, the risk is not so big. It would be equal to the distance between the entering point and stop loss order. So you should not be greedy in this case: stay into this trade until the right moment (it could happen near the opposite side of the pattern). You can try to sit the breakout in trend’s direction. If a false breakout occurs in your direction – you have to close the trade.
This strategy is a good one because the trades are opened only by prevailing trend. You can trade simple breakouts in same time in trend’s direction, because they increase the probability of your success.