Forex Trading Strategies When False Break Happens
We open a buy or sell position when the price has broken through the support or resistance levels, but it turns the direction of the price movement to reverse, not in accordance with our previous predictions until our stop loss hit. How to avoid this type of misconduct?
False break is a break signal (breaks the support or resistance level) is wrong, or also called a fake break signal. We open a buy or sell position when the price has broken through the support or resistance levels, but it turns the direction of the price movement to reverse, not in accordance with our previous predictions until our stop loss hit. Surely we will not enter if we know with certainty the break signal will happen, but we certainly can not avoid false break if we have opened a trading position. In this series of articles discussed about some types of false breaks that often occur and how we should anticipate it before it already entered.
False breaks can happen anytime due to a trader’s response to market conditions to open a buy position at the highest price level and sell at the lowest price level. False breaks can be considered a ‘ruse’ of the market. The market is testing a support or resistance level that has been broken before it reverses course, or the market price movement does not continue beyond the tested level, but returns to its original area and allows it to be a false break.
This situation often occurs in a normal market, either when the market is ‘quiet’ or when an important fundamental news release occurs. The picture below is an example of a false break at the resistance level. The opposite can also occur at the support level.
Range: does the market move in a clear trading range? Maybe the market condition is right sideway (ranging) but its trading range is less clear.
Secure order distance: is the order to open a position already at a safe distance? Maybe we open a position at a distance that is too close to the range limit to potentially for a correction or retracement.
Technical indicators: whether technical indicators have signaled a valid breakout ?, for example ADX indicator to know trend strength, or moving average line as a penetrated dynamic support / resistance level.
Price action formation: whether at that level formed a price action setup that supports the break state that is happening. Note the candlestick formation that occurs in the movement of the price.
Looking at higher time frames: is there a breakout at higher time frames too? If yes then the breakout validity is quite large. If the high time frame occurs the opposite trend (counter trend), then need to be considered again to open the position.
From the characteristic pattern of market price movements that usually occur, the first break is usually not the real one or tends to be a false break signal. The market usually tests that level before it is actually penetrated. The next break will be greater validity. If you are unsure or unsure but still want to enter, then you should trade with a small risk with the size of the lot (position size) small.
What you should avoid is to shift the stop loss to a larger level in the hope that the price will move back in the direction you are predicting. If indeed what happens is false break you will definitely loss, and it is a habit that must be avoided in trading.
In order not to ‘miss’ when you open a trading position, in this section discussed some types of false break and how to anticipate it. Actually, many experienced forex traders can quickly recognize the occurrence of false break, and use it to reap the profit. Here are some types of false breaks that often occur in the market, as revealed by Niall Fuller from the site Learn To Trade The Market:
1. Bull trap and bear trap at resistance or support level
Bull trap or bear trap usually consists of a formation of 1 to 4 candlestick bars at resistance level or support that is as false break (trap means trap). False breaks usually occur after a strong uptrend or downtrend and the price approaches the resistance or support level. Traders tend to assume that the resistance or support level will be broken right away because of strong and aggressive trend movements. As soon as they open a buy or sell position, the price reverses by forming a bull trap or bear trap form (bottom figure)
2. False break consolidation on the sideway market
False breaks that occur when the market is in a sideway or ranging state, and consolidate to determine the direction of the next move. Traders often get stuck when a support or resistance level has been broken. The simplest way to avoid this trap is to wait until the next bar after the bar breaks the support / resistance level is completed, with the price closing beyond the broken level. The best (valid) is if it happens on daily chart. If you are trading using the price action method, you can confirm it with a pin bar formation that may be formed.
3. False break on the fakey bar formation
With the formation of fakey (false) bars in the price action setup that indicates false signals, we can open positions on the bar after inside bar, or more valid if pin bar occurs after inside bar. (Read: Trading strategy with price action: pin Bar, fakey and inside bar).
Anticipate false break with price action
With the price action method, we can test the validity of the break that occurs, especially in the daily time frame. If there is a false break, we can open the opposite position if market conditions are supportive. For broken support / resistance levels, consider the price action setup that is formed, especially the ‘tail’ candlestick that is close to that level.
How do price reactions penetrate that level? Is the daily closing price is beyond the penetrated level ?, otherwise there will usually be a strong retracement or even a reversal or a trend reversal. For example false break that occurs on daily chart EUR / USD as in the following picture, where false break resulted in a strong reversal to the downtrend.
An example of George Soros history when ‘rocking’ the Bank of England
An important example of false break in forex trading is when the legendary trader George Soros ‘shake’ the Bank of England (BoE) on September 16, 1992. See the following chart of GBP / USD:
GBP / USD breaks towards uptrend with higher peak levels from before. When George Soros did sell GBP with a very large volume, the price dropped with a very large range as well. Seen on the chart there has been a false break on the fakey bar formation.