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What is a false breakout and how to determine it

  • Metatrader
  • trading
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A false breakout is a situation when the price breaks through a strong level, but is not assigned to it and returns to the average level.

In order to recognize false breakdowns in time, it is important to understand their mechanism and causes, namely:

  • market panic at highs and lows;
  • price manipulation of market makers.

In the case of market panic, everything is simple, and an attentive trader quickly recognizes such false breakouts. They appear at the end of the trend. That part of the market crowd, which missed the main part of the trend, at such moments gives in to excitement and begins to actively open transactions in the hope that the price will go even further. In this case, often there is a breakdown of the channel or price level on the chart, but the H1 candles do not close behind the broken level and form tails.

The second case can occur in any part of the trend, what’s why it is dangerous. If big participants want to make a profit or collect cheap contracts, a false breakout can also be formed on the chart. This happens due to the large transactions that move the price to a certain level. For example, it can be the level behind which most stop orders are placed, and in this case the market maker "knocks down stops", after that the trend is restored, and the profit of the market maker increases in hundreds and thousands of times. If big players decide to take profit at a certain price, we will see a short impulse that breaks through the level and a quick rollback.

Regardless of the reason, a false breakout can always be recognized by a general feature – low trading volumes. Therefore, if you see a pulse, but the volume indicator is at low values, this is certainly one of the described cases. Use this situation or wait in the side-everyone decides for themselves, but do not forget that it is impossible to predict someone else's game.

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