How to Avoid False Breakouts

What is a False Breakout?

A breakout occurs when the price of a stock breaks its support or resistance level, indicating a trend reversal. This marks a good entry for a trade.

However, there are times when the new trend is not sustainable. At such times, the price briefly moves beyond a key support or resistance level but fails to sustain the move.

A disappointment for traders, such a movement is called a false breakout. You can see the difference:

Identifying & Overcoming ‘False Breakouts’

Fake breakouts feel like the markets are fooling you. Fortunately, there is a way to avoid them if you study one thing carefully - volumes.

To safeguard against false breakouts, a price breakout must be accompanied by a corresponding volume breakout, i.e., trading volumes on the breakout day should surpass its 10-day average at least.

A breakout supported by strong volumes is almost always more sustainable than a breakout without any volume surge.

Above-average volumes also indicate the involvement of ‘smart money’ i.e., investment interest from institutional investors - another good confirmation for taking a trade.

Learn how to spot true breakouts and chart patterns for successful traders in Ms. Jyoti Budhia’s comprehensive Technical Analysis Course.

Use “STOCK10” for a 10% discount and get the course for just ₹359