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.

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