A few ways to help traders identify false market breakouts:

  • Is the price action consistent with the major market trend? On large timeframes like D1, W1, do you see a clear breakout? If the breakout is clear then it is very likely that this breakout signal is real. Otherwise, it is very likely a fake break.
  • Is breaking in accordance with the fundamentals? If the breakout is a price response to major news releases and they are in the same direction, then the breakout may be real. For example, if EUR / USD rises due to good news from Europe or bad news from the US, then there is a high probability that a break is real. But if news goes the other way or there's no news at all, then the possibility of a false break is possible.
  • Is the liquidity and trading volume high? If a break is accompanied by high volume then it is likely that this breakout is real. At the time of the European session, the US session is probably the time when the market has high liquidity. The period from when the US session closes to when the Asian session opens, the market often has low liquidity. Breakouts that happen during times of low liquidity are often prone to failure.

If a breakout is real

If all of the above factors guarantee a real breakout, then more likely, a false breakout signal could be a preparation for a real breakout. It is possible that many previous breakout traders have had their stop losses, but the corrections after the breakout may be temporary.

In this case, you can continue to trade the breakout with real signals with a much larger return than the first. However, you need a more reasonable stop loss, which will probably be greater than the previous false trade.

So if the breakout is fake

If all of these factors indicate that the breakout is likely to be false, then your muscles will be in the opposite direction of the breakout at this point.

Thus, a bearish breakout gives an opportunity to buy, and vice versa, a bullish breakout gives an opportunity to sell down.

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