How to Recognize False Breakouts

which of the following statements about a company s strategy is false This is a topic that many people are looking for. is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, would like to introduce to you How to Recognize False Breakouts. Following along are instructions in the video below:

“And welcome to this week s strategy video with me. David jones and trading two two on two now last time around. I said. We were going to start off about price action and we do this over a couple of videos and last time.

We were talking about looking at how the market reacts when it gets near to previous highs or previous lows. And how it can give us low risk potential high reward trades. I also said that doesn t work all the time you know sometimes when the market gets near these big levels. It looks like it s going to turn again.

But sometimes we get we get breakouts for example in the last week. We ve seen a breakout for the australian dollar against the us dollar movement moving out to a tune year to year high and so this week. We re going to focus on how we might want to trade a false breakout. Because just because a market gets to a level.

It s not broken for a while and pushes through it doesn t necessarily mean that that s it the market is going to carry on higher and i m sure plenty of is if we ve ever tried trading breakouts in the past. Know that there are plenty of false breakouts. There where the market pushes through either up or down. Looks like it s starting.

A new trend and then probably reverses and goes the other way. But this isn t necessarily a bad thing and this can still prevent profit provides opportunities to trade the market so again give us this low risk. But high rewards entry point into a trade. So as usual first of all before we look at any real examples.

Let me just scribble down and show you at what i m talking about when it comes to false breakouts and why using price action they can still give us trading opportunities let s just remind ourselves from last time around what we were looking at when it came to price action trading. We re looking at simple setup. Where the market finds strength like this ahead of a previous low and we were looking to buy in if there happened and that s fine of course when it works. But but as ever with all these things nothing works all the time now we have a situation where a market may do that and break through the previous support.

We ve covered this sort of thing in the past when we re talking about trading breakout. It s in an ideal world we want to be a seller here and the expectation is for the market to maybe sell off like this. But again that doesn t happen all the time. So let s just take a couple of steps back here so in the situation.

Where the market has broken below below this has changed a bit plenty of people s perception of where there is value in the market. We may well have seen buying coming in around about the hundred level before that hasn t happened this time around. But if a market breaks a big level and we don t get there suspected follow through there could be an opportunity so the market does break below this previous low. But we don t see the market sell off it pushes a little bit lower.

But then it starts to stabilize. Once again. We could have an opportunity here based on what the price action is doing if it does turn out to be a false break then what we re looking at for the market to push lower. But then really have to gone nowhere.

So here we ve got another lowest potential high reward opportunity. If we re buying in here. Let s say at 90 and the low that we ve seen is 85. If we ve seen the market stabilized like this setting up potentially a double bottom.

We ve got an opportunity to be a buyer with a relatively tight tight stop. If it does end up being a false break. It s completely reasonable for the market to push back in to the range. It was in before at the very least so it can give us a low risk.

And again potential high reward setup. So here s the flipside in a market. That s been hitting a level. It can t get through so.


The expectation is for the market to fall away again from this level. But if we get the false break it might look something like that and again. The trade here is to be a seller to short sell here with a stop loss above that most recent high. If it is going to be a false break its pushed out and the expectation would be for the market to the very least pull back into the most recent rain.

So even if you see big levels right on charts. It s still worth keeping an eye on to see if you get the follow through after the break. And if not just keep an eye on what that price action is doing if we get a lower initial high after that first breakout high and the market starts to pull back it can be an opportunity to sell with a relatively tight stop and looking for the market to pull back into the previous range. Okay.

So that s some of the theory about how to trade a false breakout. We wait for the breakout to slow and then we see if the market turns around and it s always easy to explain these things in theory. So what i m going to do as usual is look at some real examples and this week. We ve got three real examples so these things are not uncommon these sort of patterns.

So let s start off first of all with the short term example. Here s a great example in gold from the 19th and the 20th of july. So what we re looking at here. This is a 10 minute 10 minute candlestick so 19th of july early hours.

The morning. The price of gold is drifting off. And you can see here it sets. A low between 10 00 to.

9. 00 and 9. 00. O clock.

In the morning trades as low. As about 12 35. The market bounces back during the course of the morning in the early afternoon up as high as 12. But nearly to 12 44 marks.

And we saw a good good move off that levels. It s clearly left a very big level that plenty of traders will be watching now let s jump jump here to the end of the chart. Let s see what s happening here. So this is a 20th of july again.

It s sort of in the morning since between 9. And 11 12. O clock in the morning. The price is selling off it looks.

Like it s going to hold over these old lows. Bounces back. But then start to trade lower. And as the morning goes on it breaks below that previous day s low so again this this is a suggestion this breakout.

That maybe the price is going to start trading low. We ve broken a big short term level. The lows from yesterday. Let s see what happens next remembering that these are 10 minute candles.

So this if we re looking at trading false breakouts. It s a move like this. But that makes us study. The market a bit closer and think right okay is the market going to follow through so let s see what happens so over you can see over the next two ten minute candles so over the next 20 minutes.


The market does bounce back up so we ve got what does look like a false breakout to the markets sold off below that low. But we haven t seen the follow through really quickly the markets reversed. So we may want to be a buyer back here around about 12 30. Seven and a half with a stop loss just beyond that previous low because if this is going to be a false breakout by definition.

If the market sells off it shouldn t take out that first low. So we might have a stop the other side of 12 35. And when a buyer at 12 30. Seven and a half let s just fast forward in time.

And see what happened next. So. This would have been on the 20th of july around about one o clock. Where we would have gone in with an without stop.

The other side of that low the market goes up the sideways. Then starts to rally and then really rockets ahead. So you can see just how these these false breakouts. If the market does end up recovering.

And it can set up low risk and potential high reward opportunities. So there s our short term. Example. Let s have a look another one will we ve stepped the timeframe up a little bit different market slightly.

Longer term timeframe and let s see how they serve this price. Action. Trading unfolds. Breakouts might have worked right what we re looking at here is dollar yen from the 18th through to the 20th of july and each of these candlesticks represents an hour s worth of trading.

You can see a high has been left on the chart from a couple of days ago. If we assume we re here on the 20th of july 8. O clock. In the morning back on the 18th of july.

At 9 00. In the morning. The market had traded as high as 112 37. And then sold off over the next day and a half slipping back towards 1 1150.

So we ve seen something like an 80 point drop off that level. The market starts to recover. And we re getting back near to the old time. Now.

The assumption is the market is going to run out of steam up it as some people may well be selling short let s take it forward an hour at a time so the markets nudging that level. So we are we ve got the first song mean of a breakout. So some people might think well if we see the market follow through here. We re going to see a much stronger recovery in gali n.

Let s see what happens in the next hour. The market pushes a little bit higher again. So we are pressing that level and for some people again this would be a breakup. But if we re looking for a false breakout.

What we re looking for we ve had two hours now when the markets push through that level. Without making any real progress is the market going to run out of steam. So in the next hour. The candlestick does this so an aggressive trade here based on the price action.


Yes that level has been broken. But it s only been broken by about four or five ticks. We re assuming this is just a false little breakout and based on what the price actions doing the market has reversed. We could look for sell short.

So if we re selling here around about one 1229 our stop loss. We go somewhere the other side of here. Maybe one 1250 and we re assuming. It s a false breakout and the market is going to pull back into the range.

Let s walk it through hour by hour once again. The market starts to sell off we have an hour where you go sideways. But then the market does push much much lower so in an example there when it s pushing near a resistance level an opportunity to sell short if a level gets probed. Where there s no real follow through let s look at our final example now just to show that this does work across all time frames.

And all sorts of different markets. Because it s just the price action that we re looking at so let s look at a longer term time frame again and another different market. So what i ve chosen is the share price of apple other words. It s one that that we all know and we re looking at a daily chart.

I have to go quite back in time so this is the period september 2015 through to april 2016. So what we re interested in are the lows first of all down here so we ve seen the apple. The apple share price fell from about 122 dollars down. As low as the 94 level bounced back up to 112.

And it s currently when we re looking this chart trading around 106. So let s just pick up on those lows from down. Here. So clearly that was pretty good support.

We ll right click change the color to make it or a bit clearer. And now. We re going to jump forward in the future. So we ve jumped forward here.

We re now looking at the end of april beginning of may you can see the price is actually gapped down maybe. There was an earnings. Okay now the market was a bit. Disappointed the share price gap.

But it looks like so far it s holding it s holding around this ninety. Two and a half level now. Some people have you thinking. I m going to buy him.

I m going to buy and put my stop loss because over ninety two and a half perfectly sensible strategy. But when we re talking about it from from a price action trading. A failed breakout. Let s take a couple more steps forward in time to see what happens with the share price.

So we ve jumped forward to the third week in may. Now. If some have been buying here with a relatively tight shot. They behave in that tight if they re buying at ninety three with a stop at ninety.

They d have been taken out with this sell off so we ve seen we ve had one day where apple has moved quite sharply lower below that level so it could well be the start of a breakout. But of course could also be a false breakout. This is where we ve got to watch the price action to see what happens next so over the next couple of days following that breakout. We haven t seen a follow through lower on the price.


We ve seen the price actually regain this old support. And it s currently trading around about ninety four dollars a share. So if we re trading off the price action. Assuming this as a false break an aggressive strategy here it could be a buyer wherever.

It s trading. I 94 with a stop loss under that low under that false breakout. So far points that would be below was 89 42. So maybe a stop loss at 89 for a buyer in 94.

With a stop loss at 89. Let s see what happens next. So the price has moved higher. We ve traded back up to 100 briefly above 100 a share.

So at holman. This is looking like a false breakout. Now for some people that sort of move would be enough other people may be looking for a bigger move. Let s have one last look at the apple share price to see what happened over the next few weeks.

So here we go we ve jumped forward. Quite a bit here the breakout started in may the market did push higher to 100. It did come back down and test it before pushing much higher and back beyond those previous april heights. So there s an example it s it s clearly.

It s quite a great example because the market has moved so much higher. But just an example of how watching the price sanction seeing it break below for one day. But then stabilize can still give us a low risk. But high reward opportunity even on the higher time frames.

Like this when we re looking at daily charts. So there we go there are three examples showing. We re using the setup of a false breakout. Then watching the price action can give us an excellent trading opportunity as usual.

I have to stress this doesn t work all the time you know we do get breakouts. Where the market never looks back and then carries on in the direction of the breaker. This is why it s really important more than ever to be disciplined with your stop loss. If you re buying for example.

A breaker supports assuming. The market is going to recover in it s a false breakout. You do not want to be in a trend that suddenly falls away. So having that discipline with stop losses cutting your losses.

Tight. So cutting your losses quickly. But giving it an opportunity to develop into a profitable trade. If it does go the right way is really important that s it for this week.

We ll wrap up this session on trading strategy using price action as usual if you re not subscribed you click the button there you ll get notified whenever we upload a new video if you like the video and click the thumbs up at the bottom. And if you d like us to cover anything in the future or you ve got any questions about what we ve talked about today. We do regaled comments. Too just leave us a message in those comments below.

But for this week from me david jones and trading two on two will wrap things up there and ” ..

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