BREAKOUT vs FAKEOUT

Feb 21, 2022

Trading breakouts is a most profitable trading strategy that involves buying or selling an asset after a long period of consolidation.
Confirming breakouts before jumping into a trade is the key task to become a successful breakout trader.

Now lets see about the important key points to consider to confirm such valid breakouts

TYPES
There are different types of breakouts including
1)Trend line breakouts (diagonal form of S&R) ,
2)Horizontal price breakouts,
3)Pattern breakouts (double top, double bottom & other)
4)All time highs/lows breakouts,
5)Fib level breakouts etc.,

The support and resistance lines that are drawn at potential breakout points "should be seen as area/zones instead of fixed lines".



BREAKOUT :
A breakout is when the price of the stock breaches a support or resistance levels that has previously formed followed by a strong candle close.

FAKEOUT :
A false break or fakeout, as the name implies, is any move above a resistance or below a support followed by a reversal that fails to close above or below the broken level.

WHEN THE FALSE BREAKOUT HAPPENS :
A false breakout happens when there are no enough buyers or sellers to continue supporting the stock towards the breakout direction.
In the examples above,the upper false breakouts happened because there were no enough buyers to continue pushing the price higher & tends to reverse similarly viceversa for the lower false breakout.

VARIOUS SCENARIOS OF FALSE BREAKOUT





POINTS TO REMEMBER
1)False breakouts can be avoided by waiting for strong candle closure above or below the levels to confirm the breakout strength.
2)Avoid the breakouts with non-stop parabolic movement (without pullback or retest).
3)Instead of using a single line as support or resistance, it is better to have an area/zone that covers all shadows in previous touches.
4)To take entry, always wait for the zone to breach by the candle closing confirmation combined with price action.


Hope it was helpful to you,
Happy Learning & Profit making :)

Thanks & Regards
Divyaapugal