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How to Earn Profit in False Breakout | Best Trading Strategy
Table of Contents
Introduction
Sometimes it happens that a breakout is occurring, and you decide to buy, but then the market reverses, leading to a loss. This doesn’t happen just once but multiple times, and it’s not just your problem; almost all traders face this issue.
So, is there no solution to this?
Of course, there is a solution, and I’m here to give it to you. You have come to the right place because now you won’t keep losing money repeatedly in false breakouts. Instead, you will make money from them.
In this blog, I will provide you with a super successful swing strategy that will allow you and your friends to profit from false breakouts. This strategy is based on price action, and I will teach you how to apply it by reading charts.
So, let’s move forward and discuss how to trade on false breakouts and what the strategy is. But before that, let me explain what breakout and breakdown are. Then I will explain what false breakout and breakdown are, so you can easily apply the strategy and trade effectively.
What are Breakouts and Breakdowns?
In trading, a breakout happens when the price of a stock or asset moves abovesignificant level, like resistance point. It is a signal that the trend might continue strongly in that direction and it called breakout. See the chart below…
This is the chart of Mazdock that you see above. In this, the share was under resistance for quite some time, and then there was a breakout followed by a good move.
Breakdown happens when the price of a stock or asset moves below significant level, like support point. It is a signal that the trend might continue strongly in that direction and it called Breakdown. See the chart below
This is the Reliance chart above, where the support level was broken to the downside, leading to a downward move.
Understanding False Breakouts and Breakdowns
This is exactly when a breakout or breakdown is happening but then fails.
False breakouts& breakdowns occur when the price briefly moves beyond these levels but then quickly reverses back. This can lead traders to buy or sell based on the breakout& breakdowns, only to find the market moving against them shortly afterward. See the chart below…
And
So, I hope you now understand false breakouts and breakdowns.
The False Breakout Strategy
Now it's time to provide you with a strategy that can help you make good profits. This strategy is called the ‘False Breakout Strategy.’
Here are all Steps to Implement the False Breakout Strategy.
a. Timeframe: We will open the stock chart in the daily timeframe because this is a swing strategy.
b. Identify an Uptrend: The stock or index we are going to trade should be in an uptrend, meaning it should be making higher highs. See the chart.
c. Retest after Breakout: The stock should retest the resistance level after breaking out. See the chart...
At the retest point, the resistance has now become support because, after breaking it, the price is retesting the same level. So, when the price moves in the opposite direction after this point, it is called a false breakout or breakdown.
d. Confirm the False Breakout: When the price breaks below the support level and the candle closes below it, this is called a false breakout/breakdown. See the chart...
e. Determine Entry Points: When the candle closes below the support level and the next candle comes back up and closes above the support, you will take an entry after the high of this candle is broken.