False Breakouts Are Key Trading Opportunities

False breakouts frustrate many new traders. Pros know they are a part of trading and a huge opportunity. Here’s how to use them to your advantage.

You come up with a trade idea based on an important technical level. It might sound something like this: “If the CAD/JPY can break above the daily chart resistance level of this big triangle pattern, it will likely advance 300 pips or more over the next one to three months.” The timeframe or size of the pattern doesn’t really matter, and either does the asset being traded. The concept works the same on all timeframes and in all assets.

It’s a big pattern, so lots of people are watching it. The price breaks above the pattern and starts to fly higher. It moves 50 pips above the pattern but then starts to tank. It moves back into the pattern, dropping below recent swing lows. 

New traders are frustrated by this, blaming manipulation, algorithms, or stop loss hunters. They are angry or sad they lost (or didn’t make a big profit like they expected), and don’t realize a real opportunity to make their money back is staring them right in the face. 

False Breakouts are Often Tradable

False breakouts are a gift! Yes, there is often a losing trade associated with a false breakout, but it’s not just you. Lots of people are losing on that false breakout! That’s the false breakout’s power. When a false breakout occurs, a portion of traders are trapped in losing positions. They need to exit, helping to fuel the price in the opposite direction. Those without positions (or positions opposite to the breakout) just saw the price try to move one direction and fail. Their conviction and position size is likely to increase in the failed breakout direction. So a failed rally results in hard selling, for example.

Many traders are so focused on one trade and trying to make money on that one idea, that they miss the power of getting into a trade in the opposite direction when an idea doesn’t work out. 

I don’t reverse my position every time there is a false breakout, but when conditions are right it can work out well.

CAD/JPY had a beautiful and profitable false breakout to the upside. The pair was moving above a key level. The price ended up consolidating around that key level for some time (red box on the chart below). The price then broke to the upside. This made everything look really good for a further upside move. On a good breakout, the price should have run aggressively higher, and any pullback should have stalled near 83.70 or above.

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Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using ...

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