Breakout trading strategy is one of the most widely used strategy by traders. As it provides a perfect entry point and a good spot to keep our stop loss.
But it can be dangerous also, because it also gives false breakouts. And if we stuck into false breakouts, there are high chances that we can make a loss.
In this article, you are going to learn about how to avoid false breakouts?
Strategies to avoid false breakouts
1.Consolidation Before Breakout
Consolidation means, stock is neither going up nor down, its just trading sideways. In this strategy, we look for the consolidation of a stock before giving breakout. As shown in image.
But why we do this?
If the stock is not moving in either direction, it means buyers and seller have no idea what will be the next move. So, they are just waiting for the particular direction.
After breakout, traders get a chance to enter into a trade. They can place their stop loss below or above the consolidation area. The more stock consolidates before breakout, the more traders come, as they get time for entry. And this makes a perfect set up for a buyer or seller.
2.Retest or Consolidation After Breakout
Retest means, after breakout, price comes to the same line, it touches the line and continue its direction. In this strategy we look for either retest or consolidation after breakout.
If the stock is giving breakout, traders always look for entries. If there is no good place to keep stop loss, how new traders will enter? Retest or consolidation after breakout give traders a good spot to keep their stop loss.
3.Avoid big breakout Candle
If there is a breakout with big candle, it should be good new for you. Because it shows the strong buying. But there is a catch!
If there is a breakout with big candle, where will you enter into the trade? Most of traders wait for the candle to close, this way you will miss an opportunity. Other trader will also miss trade. If short term traders are getting profit too with less time, they will try to book their profit. This way price will fall.
It also doesn’t provide a good point to keep stop loss, so many traders avoid this type of breakouts.
4.Avoid Breakouts Without Consolidation and Retest
IF a stock is giving breakout without having consolidation and retest, there might be a chance price may come to the breakout level.
Let’s see why?
Those who have bought at support level, will have to book their profit somewhere. And other traders also waiting for breakout. If the stock is giving breakout directly, they don’t have enough time to book profit and to enter into new trades. So, stock eventually comes to the same level.
Final Thoughts
Breakout trading strategies are one of the most profitable strategies. But they come with some risk also. If you learn how to identify risky breakouts, you will avoid a lot of false breakout and also losses.
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