Trading strategies using key support / resistance levels are among the most popular and often used in trading practice by most traders. However, behind the seeming simplicity of the trade of the rebound from levels, and their breakdown lies a lot of nuances, which are often the cause of an unsuccessful trade deal. One of them is a false breakdown of levels, which cannot be identified correctly identify on the chart by all traders. It is the trade of false breakdowns that leads in most cases to incorrect entry into the market.
To minimize the risk of trading levels, let us study the concept of “false level breakdown”, the logic of their formation, types and how to avoid mistakes in trading levels.
So, a false breakdown is a situation where the price of the traded asset breaks the level, but it cannot gain a foothold above or below it and comes back. Schematically, this pattern and pattern are shown below.
They are often called “bullish ortrap” in literature. You can come across them quite often in the upward and downward tendency, in consolidation, in figures of the graphic analysis on statistic and dynamic (movings) level.
LOGIC OF FORMING FALSE BREAKDOWN
At the heart of this price behavior there are two mechanisms.
1.The lack of demand or supply on the market.
In this case, the price is actively moving to an important price level, but as we approach it, the size of bars (candles) begins to decrease, and volumes – begin to decline. This means that at these levels, the demand for the asset falls sharply due to a decrease in theof the traded asset or unwillingness of traders to buy / sell the asset at a too high / low price. And the output of prices beyond the important level (false breakdown) has no chance of continuation. In this situation, most often the market goes into a flat state.
2. Getting the position by a marketmaker / specialist due to small traders.
As you know, when the price moves up / down, the marketmaker takes the opposite position, that is, he provides liquidity to the asset. When the important price level is reached, the activity of the participants decreases and the demand / supply falls. The marketmaker, in order to close its existing position and turn, needs to collect an asset at the prevailing price. Not being able to place his applications for the purchase / sale of an asset at one time, he performs manipulations (actions contrary to his intentions), provoking the “crowd” to sell / buy a trading instrument, that is, create additional supply / demand in this area. For this, he makes a false move beyond the boundaries of the resistance /and most small traders, following the logic, buy / sell an asset to a marketmaker. Having gained a necessaryand closed the current position, the maketmaker starts moving to the opposite side, and the crows loses money. It is a false breakdown, most often used by a marketmaker for these purposes. In this variant, the price is suitable and breaks the level with large-size bars and high volumes, but after the breakdown volumes fall sharply. This indicates the activity of market participants and requires knowledge of patterns for identifying false moving.
TYPES AND VARIANTS OF FALSE BREAKOUT
False breakout patterns can be different: single (puncture), double or multibar (tampering).
Instant breakdown – the price makes a sharp move out of the channel by one bar / candle (puncture) and comes back, while the bar / candle closes below theand above the. Such a candle should have a highand a long upper shadow ().
Breakdown of the level by two bars with the closing of the first step above the(fastening above the level), and the second – its return and closing under theand, conversely, for the. It is very important here that theof the candle return is greater than theof the candle penetration.
Breakdown of the level with subsequent tampering over / under it (trade in a narrow range), return back. Here, the largestshould have a candle breaking through the level and a return candle.
On the chart, it looks like this:
TRADING OF FALSE BREAKDOWNS:
It is impossible to formalize all the rules for trading a false breakdown in a short article, but only the most important ones. First, the trading algorithm:
•Never enter the market until the breakdown candle is completely formed (closed), ideally – it is not worth to enter the market at all in general. The beginning traders do this mistakenly as they emotionally react to the breakdown and are afraid to miss the move. It is necessary to make a decision after the formation of the next or several subsequent candles, depending on the type of the forming breakout pattern and the market context. Many traders take the sharply increasedfor a breakdown candle as a basis. But the reason for this phenomenon can be not only the entrance of new buyers, but also the banal demolition of stops, which is especially common in the breakdown of levels (boundaries) of price channels. Below is a schematic diagram of the algorithm for entering the market after the completion of the formation of false breakdown patterns.
• after breaking through a strong level, carefully analyze the forming patterns, among them, often form reversal, which can tell you a lot about the current situation. The figure below, as an example, shows the situation on the chart with a false breakdown and several signals for a spread
Always be very attentive: if the price matches the strong level the marketmaker will probably provoke the next false breakdown. And do not forget that level breakdowns including the false ones often happen as a result of strong news. And the last one, some traders avoid trading of such moves. This is completely in vain, since the trader loses the chance to enter into a deal at the best price with a small stop which allows to reduce the risk and easier to keep an open trading position.
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