How to Avoid False Breakouts

Use this to stay away from false breakout signals →

Hey there!

In today’s edition, we’ll tell you how you can spot and 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:

Successful breakout

Failed breakout

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.

In instances where a price breakout lacks support from volumes, you can consider initiating a smaller trade (around 5-10% of your intended position) and add more only when volumes start showing meaningful growth.

Share this strategy

facebook logo  twitter logo  linkedin logo  mail icon

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 

Happy learning,
Upsurge.club

Join the conversation

or to participate.