False breakout. How to identify and trade false breakouts

Before the price executed a true bullish breakout (8), several false ones were formed (1, 3, 5 and 6). Patterns number 2, 4 and 7 show examples of bearish false breakouts.

Another place where you can expect false breakouts are the round psychological levels (as an example, we can consider pattern 2 in the chart above, when the price moved under the ‘rather round level’ of 220).

Psychological levels have a property to attract the attention of traders for making decisions. For example:

• ‘I will hide the stop after the strong level of 100’;
• ‘if the price broke 200, it will reach 300’.

That is why we come across such situations as, say, in the bitcoin market (look at the chart below). After breaking the level of USD 30 thousand once (1), the price formed five false breakouts (2) of this level to:

• activate buyers’ protective sell stop orders, hidden behind the strong level;
• involve emotionally unstable participants, who thought: ‘it fell to 30, so it will move to 20!’, into sells.

Events with 4 false breakouts of the round level of USD 40 thousand per coin in a row (3) are similar processes but in the mirror reflection:

• ‘I will hide the stop behind 40k’;
• ‘it broke 40k, so it will reach 50k!’.

Moments of high volatility represent the time when the market displays its pure cunning predator nature. At these moments, the probability of the appearance of false breakouts (to be fair, true ones also) increases.

We can use as an example the false breakout situation in the bitcoin market when Coinbase got listed on the Nasdaq exchange. This chart is shown above, that is why we will show for one more illustration how the first 30-minute candle made 2 false breakouts above extreme points of the previous session at the opening of the Sberbank stock trading.

Useful links:

• Article about trading on news.
• How to trade at the market opening.

Trend is a price direction. Many experts and experienced traders recommend to trade along the trend in order to increase your chances for making a profit.

The same point, which rationality cannot be disputed, is very true for trading false breakouts:

• if it is an uptrend, pay more attention to false bearish breakouts;
• if it is a downtrend, focus on false bullish breakouts.

Example. The Moscow Exchange EUR/USD futures (daily period).

The price formed false breakouts (1) of the 1,200 round level on April 14-16, 2021.

Then, a true breakout took place. By the way, note the false bearish breakout, marked with a red arrow. Such local breakouts often confirm the true nature of a more global breakout in the opposite direction.

The price consolidated above the 1,200 level during the following days. Traders received the facts, which confirmed that bullish moods dominate in the market, because the price increases, and whatever trend indicators you take, they will show buying signals.

If you take the confirmation that there is an uptrend in the market as a basis, give preference to false bearish breakouts. A good entry point was not long in coming. The false bearish breakout of the April 21 low took place in the market already on April 22 (3).

Another case was on May 5 (4). The price ‘looked’ under the 1,200 low in order to hook the stop losses, ‘hidden’ there. When there is an uptrend in the market, the buyers tend to increase their stops (the trailing tactics). Use it for your benefit: false bearish breakouts in the growing market context is a way to enter a trend when others are forced to exit from it.

If you assess false breakouts in the acting trend context, instruments for building the market profile can help you. As you know from the auction theory, Steidlmayer and Dalton studies and articles of the market profile researchers, the price development could be split into 2 stages, which interchange in the endless cycle:

trend → balance → trend → balance → …

The following will be formed on the profile:

1. Bell-shaped bulges when the price is in the balance.
2. Thin (narrow) profiles when the price, during a trend, advances to new balance levels.

You can study this topic further in the following articles:

• how to use the horizontal volume;
• the market auction theory;
• 5 important elements of the TPO indicator according to Jim Dalton.

We will illustrate our advice using a practical example. Below you can see a daily GBP futures chart.

The price quickly moved up on April 18 (1). Besides, the ATR indicator (with the period = 1) shows that the day was especially volatile (in fact, that was Monday, April 19, but the chart shows May 18 because of different time settings).

Besides, the price left the balance area, which is shown as profile A, and moved up in order to form a new profile B. What does it mean? It means that actions of the market participants testify to the fact that balance A is not topical any more and the demand-supply consensus is somewhere higher. That is why we can see that the maximum volumes of trades are executed at 1,385-1,395 levels, forming bulges on the profile.

Based on these facts, we have the grounds to state that if there are trend moods in the market, most probably, they are bullish ones. Then you have to look for bearish failed efforts to push the price down if you want to trade false breakouts.

The expected setups emerged on the last April day (2) and first May trading day (3). Moreover, there is something interesting in these false breakouts:

• they go down below the bar low (1) on April 18 because, most probably, traders posted stops below the low of this significant day;
• the low 3 goes below the low 2, so, there is a double false breakout. The second one ‘cleans up stops’ under the first one;
• perhaps, there was an effort to ‘look’ under the round level of 1,380, but it withstood.

And when the maximum number of buyers were forced to exit from the market, it manifested its real bullish nature reaching the 1,415 level by May 9.

Useful articles:

• How to improve trading by the market profile.
• ’Narrow profile’ trading strategy.

You can use all kinds of indicators for the false breakout trading strategy – for example, for receiving a signal from smaller time-frames about an entry into a position when a potential false breakout has been formed on longer time-frames.

We will show you in this article how to get confirmations with the help of the Speed of Tape. Although you can also use other instruments – Cumulative Delta, Cluster Search and others.

Example. Speed of Tape is the indicator of the speed, with which new prints appear on the tape. In other words, it shows how often trades are executed. Besides, it has a useful possibility of selecting the income data. You can set up the indicator for the speed of buys / sells / ticks / volume / delta. We will use the Speed of Tape in the Delta mode.

The cluster chart below shows the GBP futures price dynamics. We will use the tick frame in order to see every detail of the fast moving false breakout, which is marked with number 3 in the chart (the May 3 low).

We marked the previous session’s low level with number 1.

When the price moves below it (2), a big red cluster appears in the chart (61) and the Speed of Tape indicator shows that the speed of the sell trades execution sharply increased. This is typical for cases when the price reaches the pending order accumulation level (in our case – the buyer stops and the seller breakout orders).

However, the situation changes dramatically on the next bar. The price quickly moves back behind the breakout level and the indicator (3) shows a shift towards a positive buy. This is the sign of the fact that the false breakout took place.

You can act:

• aggressively, looking for points of entry into a long immediately after the bar (2);
• conservatively, for example, by opening a long from the level (4) of a big cluster with the green delta, which appeared in the false breakout formation completion.

Useful links:

• Tape analysis with the Speed of Tape indicator.
• Delta and Cumulative Delta.

Is there a way to tell a false breakout from a true one?

We tend to believe that there is no magic instrument which can do it with 100% guarantee, since trading in the sensitive financial markets is a play of probabilities. We hope that materials of the present article will help you to increase your chances for success in the false breakout trading.

This subject has potential. As David Weis (the author of the Weis Waves indicator) said:

‘You can make a living, trading nothing but Springs and Upthrusts’.

Strings and Upthrusts are false breakouts in the VSA terminology. We have a separate article on this subject.

By the way, Tom Williams, the VSA founder, often spoke about Upthrusts: ‘You should become alert if you meet a white bear in Africa and not in the Arctic’. Perhaps, it would be a good thought for ending the article.

If you want to find a false breakout, look for it where it would look natural. This will increase your chances to tell a false breakout from a true one. Useful instruments of the powerful ATAS platform will help you to get a confirmation and make a correct decision with a reasonable risk.

Download ATAS to see how false breakouts are formed in the markets, which you monitor.