The greatest advantage of trading false breakouts is the precision and efficiency that comes with this crypto trading strategy. That’s why it’s one of the most popular crypto strategies out there and after reading this, you’ll know how to best apply it.
The basic concept behind a breakout strategy is to capitalize on a big move following a specific trading pattern. Traders taking the advantage of false breakouts are in fact looking for the exact inverse. So while you have traders on one side looking for a confirmation of the price action continuing within a specific pattern, another group of crypto traders is eying a different movement in the market, waiting for the price to hit an important level, the one which the bulls and bears are trying to break.
3 core elements of breakouts
Volume is by far the most important core element of breakouts. If what seems like a breakout is followed by decreased volume, there’s a good chance that what happens next is a false breakout. Verify the legitimacy of the breakout by always checking the volume, which brings us to the next point.
2. Closing price
Because failed breakouts mostly happen on higher time frames, it’s advised that you wait for the candle to finalize its formation before you enter into a position. When the price is below or above the pivot point, that doesn’t mean it will actually close there. Most crypto traders tend to wait for the daily candle to print before making a move.
3. Time of day
While crypto trading markets are open 24/7 across the world, there are peak hours in each market and that’s when successful breakouts occur the most often. That’s because things that affect fundamental analysis such as news and other data come in hot and drive bigger movements in the markets. Inversely, false breakouts usually happen when the markets enter the slower hours.
Trading False Breakouts
Looking at the price chart below, we see an example of what a false breakout looks like. It starts with a clear high in place, where the price action stops just before dropping to a lower number. It consolidates once the bulls spring into action and we see a second attempt where the price surpasses the previous high. But then, the price quickly rotates lower.
False breakout. BTC/USD. (TradingView)
Taking the core elements of breakouts into consideration, we can see in this example that the volume behind this move was decreasing. Even though a marginally new high was achieved, it didn’t hold and quickly reversed to a lower point finishing below the horizontal distance.
Firstly, the BTC price didn’t manage to close above the previous high, despite the fact it marginally created a new high. As soon as it briefly traveled north of the previous high, it rotated back lower, just to finish below the horizontal resistance. Lastly, the price action here occurred during the early Asian trading session when the majority of US and European crypto traders are not fully active.
So now that we can clearly see a false breakout on the charts, how do you actually make a profit?
In this particular case, the previous high should be utilized to define the stop-loss order. Always leave enough room for the price to move a bit higher without triggering your stop-loss order. Depending on the timeframe that you trade within, use a cushion of 10-20 pips to protect your trade.
As always, set stop-loss and take-profit orders based on your trading style and risk tolerance. For example, you might want to scalp and look for the first immediate support for bulls, or simply look at daily pivot points to determine where the price action may pause or find support. For this, crypto traders use different technical indicators such as Fibonacci, moving averages, diagonal trend lines etc.
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