How can you identify false breakouts in chart patterns? (2024)

Most breakouts tend to pull back to roughly where the price action broke out, typically a trendline. Watch for the trendline to go from resistance to support and watch for price action to trace a new high (if breakout is from a down trendline) or new low (up trendline) relative to the previous high/liw where the pullback began. These are confirmation signals of a genuine breakout. If these are missing it is risky to trade on the assumption of a genuine breakout

Lot of this comes with experience, where your gut tells you, this BO won't work.Some of the hard pointers include:1. Lack of volumes2. Breakouts in stage 4 (Read Stan weinstein staging model)3. Choppy market environment4. Late stage bases/BO in an uptrend5. Faulty primary structures.But I repeat, nothing beats experience here. More time you spend studying, more better you'll get with time

To identify such fake out, it is beyond many indicators as well. It is an algo game play by MMs and that logic beats mathematical indicators mostly.However, using indicator like RSI can help you spot failure swing and disagreement between price and oscillator and that is "divergence" which can help to take advantage of a form of fake out or sweep.Breakouts will usually raid a zone quickly in wicks and return into the trading range for reversal or continuation of trend.

Breakout without volume can be describe as one of the false breakout. False Breakout also can be detect if the volume is not significant.

Predicting false breakouts isn't easy. You can wait for one or more "shakeouts" to weed out weak traders and then buy the breakout. However, waiting for a shakeout in a strong asset might make you miss the real breakout.The key is not avoiding false breakouts, but having solid rules and sticking to them. If you buy a breakout that turns out to be a fakeout, don't try to predict it; sell according to your rules. In trading, the goal is having an edge, making more on winners, and losing less on losers. Waiting for a "shakeout" on the right side of the base, followed by price tightening and reduced volume, can increase your odds of a powerful breakout.

The complete formation of candle stick bodily closure on higher timeframe gives a higher probability level of going to find a smoother and more refined entry on a lower timeframe.

This is the best way to spot a false breakout by first waiting for the candle to close. If the body closes above/below the trendlines, then it's likely to be true breakout. On the other hand if the candle doesn't close above/below, then it's likely to be false breakout.

Three conditions are needed to detect a true breakdown of an important support or resistance level:1- The candle that breaks the level should be closed above that level in the upward trend and below that level in the downward trend. 2- The candle that broke the level has a higher ATR than the candles that brought the price to that level. 3- The candle that broke the level must cover all the shadows of its previous candles and close above them.

Ability of a trader to await patiently for retest and take advantage of the opportunity in the market is something common among traders and the only guide to sustainability of such idea is to apply proper risk management in any position that is opened.

Retests are another good data point on breakouts. If the stock price reverses to a key level and rebounds, that is a good sign. However, if the retest fails, it is likely that breakout has run out of steam. And run out of steam early. Losing steam this early means that momentum is highly unlikely.

The use of multiple timeframes has been a thing of greater clarity in the narrative of TA. The overall outlook on higher time frame that transpose to more meaningful high probability trades on lower time frame.This will help to know what the behavior of the asset is and how to plan one's trade on such.

Spotting a false breakout and acting accordingly yield some of the best trading results. The best thing about them is that the price tends to go on a revenge mode where the price counter moves off the false breakout tends to be a swifter one and carries width.I use solely trendlines marking support and resistance on various time frames. The time frame you are watching if it attains a break lower or higher to the trendline supp/resis and then falls back under to the breakpoint signals a false breakout. For example. the price breaks higher to resis on 15 mins and closes higher. It only stays marginally higher but fails to make headwinds. A few candles stay higher and then fall back under resistance. We have a false breakout scenario.

Breakouts are a great trades to attempt because you can identify and control for your risk levels. One could place a stop-loss or adding a put is another option. The level before the breakout is the ideal place.

A trade without a stop loss is like a open funnel for the market to wipe an investor's equity.The knowledge in risk management starts, hover and ends with stop loss application basically and trade management generally.As much as take profit is important, stop loss is twice as important.

Time spent near the breakout level is the best indicator for success or failure. More time spent increases the chances of success. Also if the price has travelled from a far distance without a pause, we tend to see breakout failures. It’s extremely important to take only those trades where price has spent some time at the breakout zone. This will eliminate loss making trades. Don’t regret if the price shoots up without spending time or without retest. One should not be interested in those. Knowing what not to do is more important than knowing what to do.

I would like to add that beside all the mentioned attributes,volume is very important piece of data that’s need to be confirm the breakout. Only a breakout with volume has the maximum probability of success. The volume needs to be higher than last few sessions. Breakout without participation that is volume is prone to be a false one.