How to Avoid False Breakout (and profit from Beginner Traders)

How to Avoid False Breakout (and profit from Beginner Traders)

How to Avoid False Breakout (and profit from Beginner Traders) 300 169 Minimalist Trading – Best Trading Indicators for TradingView

Whether your scalping, day trading, or swing trading, it’s very frequent to run into a False Breakout, or like the experts call it, a Fakeout.

And knowing how to avoid a False Breakout is essential for two reasons.

First of all, because otherwise you’ll get trapped into the wrong trade like many beginner traders to.

Second, because you can turn this situation to your advantage and make money from trapped traders.

In the trade discussed below, which we took on our TradingView chart, we came across a False Breakout.

Actually, it’s a False Breakout in a more widespread false uptrend.

What?

Yes, because the whole upward movement is false!

How can we be so sure?

Not only we have the RSI Exhaustion which is exhausted, but it is also significantly diverging from the price.

So the RSI Exhaustion goes down, while the price goes up.

Additionally, the price broke up a resistance but then immediately formed a market top, which is displayed by the Bottoms Tops Signal.

Trade setup – 17 Feb 2020

How to identify and trade a false uptrend Setup 1

The price is moving higher and it recently broke up a resistance turning it into a support.

However, we do not believe this price action, for the following reasons:

    1. There is a significant divergence between the price, which is rising, and the RSI Exhaustion, which is falling
    2. The RSI Exhaustion is bullish exhausted, meaning that the price doesn’t have too much room to move any higher
    3. We just got a confirmed top

Even if we are above a support, we see this as a great trading opportunity to the downside, similar to another short selling opportunity that we traded in the past.

Of course, if the price will move below the support (hence turning it into a resistance), it’s gonna be a lot better.

However, we can open the trade now because most of the buyers will soon get trapped!

Trade update – 21 Feb 2020

How to identify and trade a false uptrend Setup 2

The price is moving into our stop loss area (we’ve been pretty generous with the stop loss right because it was possible that the price continued to rise).

However, we got another top, hence the short selling setup is now even stronger.

This is clearly a fakeout movement.

Trade update – 25 Feb 2020

How to identify and trade a false uptrend Setup 3

The price has now moved below the major level indicated by the Levels and Zones, and since it is now a resistance, it should put a significant downward pressure to the price.

Trade closed – 28 Feb 2020

How to identify and trade a false uptrend Setup 4

The price has kept moving lower and even accelerated towards the end.

We have now closed another winning trade and cashed-in a solid return.

In the end, our false breakout strategy allowed us to identify and trade a false uptrend with a total profit of 3.75x.

The price action even accelerated towards the end of the trade so we got out relatively rapidly.

Especially if you are a beginner it’s relatively simple to get trapped into similar fakeouts and, more generally, false price movements.

Do you remember any trade in which something similar happened?

And did you improve your trading strategy since then?

Feel free to share it by adding your comment on the YouTube video above!