We're figuring it out. False Breakdown or breakdown

5 paź 2022

False breakout and breakdown.
How to distinguish these trading instruments of price movement and how to use them in trading

The mechanism of a false-break involves taking out the stop-losses of most traders, which increases the probability of a rebound, i.e. the profit of the trader who caught the reversal. In this case the aggressive trading method is more appropriate.




I should say at once that statistically false-breaks and bounces occur more often than breakouts.

The actions of all traders, speculators and investors form their own traces in the market, such as various strong or weak movements, the so-called patterns, complex situations, traps, reversal zones, and so on.


The important thing in all of this for us will be the price levels on the chart.
These levels and zones are visible to most traders placing pending buy orders, sell orders, protective orders and lock orders behind them. These orders and orders are activated as price approaches to test the level and zone.




Behind levels there is a large accumulation of orders, so called liquidity zones. At the moment when the price comes into this zone, it tests the density and thus at this moment the volume can increase, which can provoke the activation of all orders at all and provoke a strong distributive movement towards the breakdown.

You should pay attention to how the price approaches this zone

• 1) If price reached a level or a zone during a strong and fast movement, which exceeds the average daily rate, then the probability of a break-out is high and amounts to 75-85%.
  
• 2) If price approached a zone or a level by consolidating movements, short impulses and price shaking to the level, the chance of a breakout increases and is 55-75%.
  

Prices do pass beyond the level where they "reach" the pending orders of all traders waiting for the trend to accelerate. But then the price reverses and returns to the range.

All markets - stocks, cryptocurrency, forex, indices, futures are at the mercy of big players and market makers who buy and sell large volumes of currency and maintain the necessary level of liquidity. An attempt by an investment fund or a bank to conduct such trades with market Buy/Sell orders would result in a strong price change, especially at the boundary of an important level, so this large market component mainly uses limit orders.

Big players and market makers use limit levels for consolidations when they need to accumulate energy for further moves. It is important to understand that big players usually do not take part in the distributive movements, because they have accumulated the necessary volume in consolidations and then they remove the limit order and let the market go, at such times the price flies in long candles in one direction or another.

How to predict whether the breakout will be a false one?

The prediction of a false or true breakdown is complicated by the fact that the currency rate takes into account everything. The release of news or any unforeseen events, such as force majeure or insider information, can make large traders give up their intentions to reverse quotes or breakout levels.

In most cases, the behavior of exchange rates near important levels will tell us whether it will be a false or true breakout.


The high volatility is related to the behavior of a large player, who "pushes" the currency rate in order to collect stop-losses and turn over the quotes - in this way they gain the necessary volume.

High volatility and large candles on the approach to the level is a sign of an impending false breakout.


A breakout is defined by the reduced volatility, especially in case of an abrupt move to consolidation after a strong trend and sticking of the price to the level (most often it is a consolidation, prices squeezed to the level, a pre-breakout set-up).

Fast breakdowns with high momentum usually occur when market volatility is low. Namely the phase of pre-breakdown consolidation is formed by small candles, after the end of such consolidation we see the breakdown and the subsequent distribution


Regards R. Linda!