We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
GBP/USD
Bullish
USD/JPY
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Oil - US Crude
Mixed
Bitcoin
Bearish
More View more
Real Time News
  • What are the truths and myths of #forex trading? Find out from @DailyFX analysts here: https://t.co/uF75VPzstr #FOMOintrading https://t.co/xeromAGqqx
  • Macro data from around the world have long attested to the urgent need for a trade settlement between the US and China. Increasingly the corporate numbers are saying the same. Get your market update from @DavidCottleFX here:https://t.co/Qon7QUO80c https://t.co/rCOG78QQ2M
  • #Gold prices may fall while the US Dollar gains even as economic policies championed by the Trump administration invite inflation. Get your market update from @IlyaSpivak here: https://t.co/4lHhHsby56 $XAUUSD https://t.co/JmZxckVHdS
  • Cable (GBP/USD) remains just off its seven-month high print around 1.3165 as traders start to move to the side lines ahead of next Thursday’s General Election vote. Get your $GBPUSD market update from @nickcawley1 here: https://t.co/CpCh13J9ZH #Brexit https://t.co/PIh6WUqbsK
  • (Weekly Technical Outlook) GBP/USD, EUR/GBP, GBP/JPY, GBP/CAD Outlook as UK Election Looms $GBPUSD $EURGBP $GBPJPY #UKelection2019 - https://www.dailyfx.com/forex/technical/article/fx_technical_weekly/2019/12/07/GBPUSD-EURGBP-GBPJPY-GBPCAD-Outlook-as-UK-Election-Looms.html?CHID=9&QPID=917702 https://t.co/iuILHYczJ7
  • Why do you require consistency in trading and why does it matter? Find out: https://t.co/WlEFlluGfZ #tradingstyle https://t.co/TkMtJQKatx
  • By issuing debt denominated in $USD, China is making a long-term bet that it will be cheaper to pay back its loans over time in the US Dollar; it believes the value of the US Dollar will fall. Get your market update from @CVecchioFX here:https://t.co/5GO9UrvO4y https://t.co/xV9urXXf48
  • What are some risk trading management techniques? Find out: https://t.co/RShdlDz9RA #tradingstyle https://t.co/M3ASPIHAep
  • #Dow Jones stages impressive recovery on a firm NFP report. #FTSE 100 eyes UK general election. Get your equities technical analysis from @JMcQueenFX here: https://t.co/o28UcG6N3l https://t.co/SwGAaFCFND
  • Why do you require consistency in trading and why does it matter? Find out: https://t.co/f4y1FOOZnM #tradingstyle https://t.co/x5HgYopWc5
LEARN FOREX - Trading False Breakouts

LEARN FOREX - Trading False Breakouts

2012-11-09 03:00:00
Tyler Yell, Trading Instructor,
Share:

You know that the right trend can make your month or year as a trader. Who can blame traders for wanting to hunt for trends? We do not and we certainly recommend you take advantage of clear trends like the EUR/NZD below when trends presents themself.

LEARN FOREX - Trading False Breakouts

However, as a trader, you must be familiar with how to identify a false breakout over a legitimate break out. Many traders try and force trend entries when a breakout occurs even though the market has no intention of honoring that breakout. Any trend follower is familiar with the feeling of entering into a bad trade when they prematurely entered into a trade. It feels like a trap.

LEARN FOREX - Trading False Breakouts

It’s time that you come to grips and learn how to tell if a breakout is real or if you should fade the breakout and take advantage of the great risk: reward ratios that are available when you notice a false breakout.

This article will help you to take advantage of false breakouts that experienced traders love to trade and that trap new traders.

Here are the tools we’ll use to protect ourselves against getting trapped into a false breakout.

  1. Average True Range (14 periods)
  2. Support & Resistance
  3. Candlestick Analysis

Here’s what it will look like on your screen:

LEARN FOREX - Trading False Breakouts

Average True Range (ATR)

The average true range indicator allows you to see the volatility behind the pair you’re trading by measuring daily moves. You can use ATR to test the validity of a breakout when price pierces support or resistance. The reason we use the ATR is to determine the amount of pips the range must be broken by before we enter into the trend or decide to fade the breakout. As an example, the ATR (14) for AUD/USD is 68.0 pips as of today’s reading. The ATR (14) for GBPJPY is 114.6 pips. This tells you that the GBPJPY is 2X more volatile in pip terms than AUDUSD. We would look for a breakout from a range above 68 pips and 114.6 pips respectively before we enter with the new trend. If this doesn’t occur we look to take a high probability trade back into the newly expanded range with a strong money management system.

Rule One of trading false breakouts is that if price doesn’t break the range by the ATR, the breakout is false and we should fade the overextended move. If the pair pushes through by more than the ATR then we are looking at a legitimate trend to follow that should now be on our watch list.

Support & Resistance

As time goes by, traders focus more on support and resistance for one reason. The market focuses on support and resistance. You should too when determining a new trend or an expanded range. Support is seen as the floor that price rests on before shooting back up. Resistance is the ceiling that price reaches before revising back to the price range. If a new trend breaks out to the upside, then what was resistance now becomes support.

Support and resistance do not require an indicator but an eye to look at the chart and see when buyers stop buying in an uptrend or sellers stop selling in a down trend. We also recommend you treat them like a flexible fence as opposed to a glass floor or ceiling that will be shattered if pierced.

LEARN FOREX - Trading False Breakouts

How this applies to false breakout trade: If you recognize a false breakout below support, you can enter a buy entry near support (range low) and you can adjust trade size so that should the market reverse and move back below support to hit your stop, no more than 2-5% is risked on the trade. Finding respected levels of support and resistance is very helpful in finding high-probability trades.

Many professional traders feel that trading ranges is a higher probability set up and that because following trends is tempting but has a low probability play out, they’re better off sticking to ranges.

Candlestick Analysis

LEARN FOREX - Trading False Breakouts

Few methods are as valid and time tested as Candlestick analysis. Candlesticks allow you to see real-time market sentiment so that you can identify tipping points as they’re developing. Sentiment is important for you to know so you can see when buyers are heading for the exits when a supposed upside breakout occurs. Similarly, you can look at candles around support to see if sellers have lost confidence and are not willing to hold on to their trade. This allows you to take advantage of the false breakouts in real-time.

The two signals we see here are the Bullish & Bearish Engulfing signals which are two very strong reversal signals at very important points on the chart. As a side note, candlestick patterns take on a critical importance around support and resistance or against major pivot levels or moving average levels because this is where sentiment of traders are key.

Knowledge of false breakouts and how to trade them appropriately with ATR, Support and resistance, and Candlestick analysis can add a lot to your trading. Remember to always be patient and when you see price alerting you to a new trend or a false breakout, you will now how to approach it with confidence.

Happy Trading.

Next: Breakout Entries for Ranging Markets (37 of 50)

Previous: A Basic Indicator Breakout Strategy

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@dailyfx.com

To be added to Tyler’s e-mail distribution list, please click here.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.