False breakouts can sabotage your binary options strategy. Therefore it is important that you learn how to tell them apart from real breakouts. This will help save you money on losing trades. Trading breakouts is a very popular trading strategy, but a challenge inherent in using it is that charts will show a number of false breakouts before the actual breakout happens.
In this article you will learn how to distinguish between real and false breakouts.
Several chart formations, among them reversal patterns, continuation patterns, and support and resistance levels, involve a price level where prices are expected to move in a specific manner. In the case of trend lines, you would expect an approaching price to change direction.
Should they not do this, the chart pattern in question will be over. This will lead many traders to sell their positions and instead open positions in the opposite direction. As a result, the price will break through the chart formation with a considerable amount of momentum behind it.
Telling at exactly what time such a breakout will occur can be a real challenge. Chart patterns are nothing like an exact science. At times the market will go beyond a price level where a breakout was expected to happen only to turn back and carry on with the original movement. This is an example of a false breakout. Unless you’re careful they can end up costing you plenty of money.
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The first thing you need to do in order to distinguish false breakouts from real breakouts is to keep your eyes on closing prices for periods, rather than the highs and lows. Highs and lows can frequently represent nothing more than random movements that ought to be ignored. Closing prices, on the other hand, are far more reliable guides to the true sentiment of the market.
A lot of false breakouts are highs and lows within a period. They are invalidated when the closing price is back within the chart pattern. For this reason, the first thing you ought to do when attempting to eliminate false breakouts is to only respond to a market movement when the closing price confirms what the high or low indicated.
Another clue that you’re dealing with a true breakout, would be a rapid increase in volume. Because a real breakout entails a lot of traders selling off their old positions in favour of new ones, a breakout should occur in concurrence with a marked increase in volume. An absence of such an increase indicates that the market has not as yet experienced a breakout.
Should you be on the lookout for a safe trading signal, and don’t mind waiting to generate such a signal, you can wait for the surge in volume to confirm that a breakout has occurred. You can then invest in a binary option, accordingly. The inherent delay in this method means that it will be more difficult to succeed with a touch option. Instead, use a basic binary option such as a High / Low.
A different, but equally good, method for identifying false breakouts is to use a technical indicator like the relative strength index (RSI) or the momentum indicator in conjunction with breakout trading. Such indicators can give you a sign as to whether the movement is getting weaker or retains momentum. This information can be used to make predictions as to whether the movement is strong enough to cause a true breakout or not.
One last option is to use candlestick formations to help you spot false breakouts. Not infrequently, you will find candlestick formations that indicate a turnaround close to support levels, resistance levels, trend lines and other such formations. Should you come across this type of formation, you will know that a turnaround will probably occur. Obviously this means that a breakout is highly unlikely to happen. If the price levels in such a case were to move above or below the level, this will in all probability be a false breakout.