How to Trade and Determine False Breakouts

We start the week with a recap of crypto markets and some analysis of how you can trade and determine false breakouts.

False Trades

False or fake breakout as the name stands is a breakout that is fake in nature or it means that the breakout could not sustain the momentum it gained. A lot of traders get caught when this happens as they predict the momentum to continue in either direction and it fails.

The arrow marks the false candle. The traders tend to get distracted by this candle and think that now the momentum will change while it usually goes in the opposite direction from here and traps many traders in its trap. 

These help in taking out the novice and amateur traders who entered seeing the bull run or momentum in the market rather than some understanding and logic about the cryptocurrency. Understanding this concept differentiates experienced and beginner traders in the market.

False breakouts are caused when the price of a cryptocurrency moves over a significant level determined by price action. If the price fails to sustain the momentum and comes below the said level. When it comes below traders often look to go short on the underlying coin. Breakouts are often the entry place for most traders.

A false breakout often signifies that the sellers are back in control of the market, they even show the presence of huge institutions in the market. The players don’t want to push the price above the significant resistance and they don’t have enough confidence in the coin. Short-term traders look to exit the coin as soon as they realize a false breakout has taken place. False breakout may also just be a short-term pullback and a time for long-term traders to enter in the coin. Volumes are a very important aspect to be looked at when looking for the further direction of the coin. If the volumes coming in are still good traders can expect the coin to continue its bull run.

The arrow marks the candle where a false breakout can be seen. The candle crosses a significant resistance level but is not able to sustain the momentum. It moves in the opposite direction thereafter making a clear indication for traders to go short on the coin.

There are some ways to avoid getting trapped:

1. Volumes- The breakout candle should have higher volumes. High volumes give more conviction to the trader that momentum will continue.

2. Confirmation candle- The candle if green after the breakout often means that the breakout has carried the momentum but if it’s red the chances are very high it is going to reverse. If a trader doesn’t want to wait he should have strict stop losses to avoid big losses.

3. Watching and understanding the breakout candle- Breakout candles with long wicks or Doji candles which almost have the same opening and closing price are also a sign of the indecisiveness of the market. 

Cryptocurrency trading is much different from traditional stock trading. The world is moving toward being more adaptive to blockchain and at such a point where the market has been volatile for a while, it is a good time to enter the market with appropriate knowledge about the market. On the other hand, false breakouts will be a part of your trading journey, and using them to your advantage will get you favorable returns in the long game.