How to trade False Breakout strategy on crypto?
By Yuriy Bishko Updated November 11, 2022
In the last article, we talked about and showed examples of how level breakout strategy works. But since this is a fairly common strategy, big players often use it for their own purposes. Therefore, in this article, we will tell you:
- what is a false breakout strategy?
- how does false breakout strategy work?
- examples of how you can make money on it.
What is a false breakout strategy?
If the level breakout happens when the price is fixed above the level and goes further in the direction of the breakout, then a false breakout is a completely opposite model, the price breaks through the level or is fixed above the level, while collecting liquidity and going completely in the opposite direction.
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How does false breakout strategy work?
In simple words, a false breakout is when the price exceeds a sufficiently predictable level, and then changes direction sharply. During a level breakout, many traders open trades in the direction of a breakout. These traders fall into the trap at a time when the price is changing, which triggers stop losses.
New traders also open trades, which adds extra pressure to the price. This often turns the price into a new trend, the opposite of a breakout. Everything is simple, and a false breakout works. False breakout occurs not only on horizontal levels, but also on figures and structures of technical analysis.
Types of the false breakout
When using this system, it is necessary to distinguish and identify the types of false breakout. In general, there are 3 types of false breakouts in trading:
False breakout with one bar
In the chart above, you can learn more about the false breakout of one bar.
We see a clear level of $29,960, before the false breakout the price constantly reacted to this level. Most traders set their stop losses at this level. But the big players are well aware of this, and have used a false level breakout to gain liquidity.
False breakout with two bars
In this chart, we see the same level, but a completely different breakout – a breakout of two bars. That is, the bar closes below the level, but the next day immediately closes above the level. If the trader opens a position in the direction of the breakout, then in the event of such a breakout, he must close his trade and open in the opposite direction. The stop loss in this case must be set immediately after the breakout bar.
Complex false breakout
Another common type of breakout. Even quite experienced traders get into this trap. This is a breakout when the price closes above the level, trades a few bars, and then breaks the level again in the opposite direction, and is strongly adjusted downwards. In this case, the stop loss is set at the highest breakout point, or according to the rules of your own strategy.
False breakout is also quite common in figures or structures of technical analysis.
In this example, you can see a false breakout of the trend line.
Another example, the chart formed a triangle shape. Most market participants who trade in such patterns were more likely to breakout, but this breakout was false, after which the price went back and broke the triangle down.
False breakout is a fairly easy strategy. This information will help you better understand the market, if before you did not understand why the price after the break turned and moved in the opposite direction, now you understand that this is a manipulation of large players who are hunting for liquidity.