The worst feeling is to trade a breakout and get stopped out.
These “false” indications can often throw you off while trading in the market – and is often considered to be one of the common problems faced by traders all around the world.
False-breaks, as these market phenomena are known, are more common than you might think.
They are often considered to be the result of mass market psychology or a “herd mentality”.
Through this post we will be looking at how trading patterns that work in the contrary work using false-break patterns and fakey trading setups, enabling you to profit from others’ trading misfortunes.
Harsh though this is, it requires a lot of skill and practice to implement a successful trading plan on market conditions designed to make others fail.
Let’s begin by looking at what we mean when we say “false-break”.
A false-break is often considered to be a position of “deception” posed by the market.
This deception is found to be a test of a level which creates a break after which the market is seen to retract – causing it to neither sustain itself above or below that level.
Simply put, the market does not close outside of this level being tested and leaves behind a false-break.
False breaks are found to have big chunks of evidence for understanding market direction and the trick is to learn how to use these evidences for our own advantage.
Let’s take a look at what a false-break looks like –
The trick is to wait for the price movement to indicate that a market is trading in a particular manner and there is an opportunity to make use of the positions on a strong reversal in the other direction.
Usually, these scenarios are found to unfold when a trending market extends itself and the “herd mentality” showcases itself before the counter-trend is retraced, important support and resistance levels are reached or even at well-understood breakout scenarios.
The effects of the “herd mentality” coaxes the traders to enter when the market when they feel it’s safe to do so.
This is what Australian trader Nial Fuller terms as “Deception”.
Herd mentality lets in feelings and emotions in to the realm of trading and this in turn results in traders losing a lot of money.
This goes against the first rule of trading – keep your emotions at bay while in the market.
Fuller states how many traders become deceived because the market looks very strong or very weak so traders find it okay to go along with the momentum.
Always remember that market prices never move in a straight line – markets ebb and flow.
Fuller terms this scenario as a “reversion to the mean”.
3 Types of False-Breaks
1. Bull and Bear Traps at Important Market Levels
A bull or bear trap is usually a 1 to 4 bar pattern which is defined by a false break of an important market level.
In these cases, false-breaks happen after major directional movements and when a market approaches an important level.
2. Consolidation and It’s False-Break
A very common market phenomenon, false-breaks of consolidation occurs when traders believe a trading range might break out but find it reverse back into the body of the given range.
The trick is to wait till you find a clear close outside the trading range on a daily chart and then resume trying to find price action trading signals in the direction of the breakout.
3. False Breaks in Inside Bars or Fakey’s
Fakey is considered to be a price action pattern which needs a false-break to occur in an inside bar trading setup.
To put it more simply, if you have an inside bar trading setup, watch out for a false-break of the inside bar and the mother bar.
There are different kinds of fakey trading strategies available for traders in the market today and we will be looking at these in a different post.
False breaks can be anticipated through the use of price action of a market.
Trying to look for false-breaks at important market levels can help in beginning significant changes associated with price direction or a change in given trend settings.
Look out for the “tails” of candles that occur at or around important market levels.
Try to figure out how the prices closed after each session.
If you find that a market has failed to close beyond an important market level, this could mean a signficant false-break.