Many new day traders think that false breakout is irritating. A false breakout happens when a stock, forex, or futures contracts look about to move to one direction, it moves, then it suddenly reverts to the opposite direction.
This situation has stopped many day traders or put them in a losing position. Therefore, false breakouts are frustrating and costly for many day traders. Yet, the truth is, everyone can reverse the situation. Here is how you can gain capital from false breakouts.
The Psychology of False Breakouts
Many traders learn various breakout strategies when they first interested in trading. The idea behind a breakout strategy is to get a big move from a pattern that easily spotted.
Indeed, trading breakouts can gain huge profits. Yet, you have to be extra careful with a false breakout. False breakouts can be really frustrating when market continuously tells you something wrong.
Since it happens many times, now, you have to start considering trading false breakout instead of the trading breakout.
False Breakout Strategy
For example, a thick chart of BBB company shows moving higher prices, then pull back low, and move back in a higher direction. During this period you have to ask yourself these questions.
- What is the trend direction of your trade?
- What will trigger a false breakout? If that happens, where and how will you get in? Will you use a market order or limit order?
- Where should you put your stop loss?
The strategy can be simple, yet it requires practices and focus to use it. Let’s get back to the example. As the trader, you have to consider that the price will continue to decline if it declines below the previous swing low.
If that happens, you should not go long. Yet, if the price moves slightly from the previous low, then go sharply back above the previous low, you have to buy it.
Do not forget to set a stop loss below the new low. That way, you just need to monitor the price moves and find the point to exit a profitable trade.
Yet, if the price moves again sharply higher and breaks above the previous high, then pauses near the top, then exit immediately.
