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Guest Commentary: Haunted by False Breaks? There’s One Thing You Shouldn’t Do

Guest Commentary: Haunted by False Breaks? There’s One Thing You Shouldn’t Do

2011-08-29 13:40:00
Yoham Elay, Forex Crunch,

You place a buy order above the current range and catch the break. The pair moves higher, but doesn’t get too far, retreats quickly back to range and catches your stop loss. It then makes the break once again, but this time with full force, moving significantly higher and reaching your previous Take Profit point.

Sounds familiar? For some, this is too familiar. What can you do about it? The answers vary, but there’s clearly something you shouldn’t do.

The scenario described above can happen in the other direction as well – when you enter a short on a break only to see an initial false downwards break that catches your short position, but not for long.

Here are some things you can ask yourself:

  • Range: Was the pair indeed trading in a distinct range? Perhaps the whole trade idea was based on a range that wasn’t distinct enough.
  • Safe distance: Was your order far enough from the range? Perhaps you caught a small dip on low volume that was later corrected.
  • Channel?: Is the pair moving in an upwards or downwards channel? Perhaps you were looking into a flat range while there was a trend lower or higher.
  • Bigger Picture: Did the break coincide with a long term trend, or did it go in the opposite direction? When this is a counter trend, it is more tricky.

After checking all these things, you are certain that you made the right decision with the correct parameters, and still lost the trade. Well, this happens in many cases.

The first break is not the real one.

In many cases, new ground is tested briefly before the real move. In order to protect yourself, a smaller position size is a great solution, that will reduce the loss potential.

The second break already has better chances of succeeding, and a normal position is size can make more sense. As always, be careful!

What shouldn’t you do? Do NOT move your stops.

It may be a false break with no real break to follow up on it. If this is the case, you’ll just lose more. And if it does accidentally work once, you’ll develop a bad habit that can open the door to huge losses in the future.

Do you experience false breaks? Do you have any tips to share?

Further reading: 5 Most Predictable Currency Pairs

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