HOW TO AVOID A BREAKOUT HEAD-FAKEAVOIDING FALSE BREAKOUTS
1. Declining Volume and ATR/Volatility.
2. Candle Close Outside the Consolidation
3. Significant Volume on the Breakout.
4. If You Get Head-Faked, Close the Trade.
How to Avoid False Breakouts
Prevent a Head Fake
You can't avoid every false breakout. There is no magic formula.
There is no way to know what the market is about to do.
What we do as traders is take advantage of little patterns and clues that the market is going to possibly do a certain thing.
This is all based on probabilities.
These patterns and clues never worked out 100% of the time.
That is why we manage our risk on every single trade because there are no sure things.
There are things you can do to increase the probability that you are not going to get tricked by a false breakout. Lets take a look at them.
AVOIDING FALSE BREAKOUTS
1. Declining Volume and ATR/Volatility. Watch for declining volume & atr/volatility on the consolidation before the breakout. This shows that there are fewer traders willing to risk money that price is staying in the consolidation.
2. Candle Close Outside the Consolidation. Candle closes, especially daily & weekly, are very important events. Day traders like to square their positions at the end of the day. A bearish day trader who is done for the day will close his open shorts which is a buy causing the price to pop up. If price has pushed below the consolidation during the coarse of the day, price will often retreat back into consolidation after day traders square their positions. A daily close below the consolidation means longer term traders are selling. Reverse is true for bullish breakouts.
3. Significant Volume on the Breakout. You want to see significant volume on breakout candle close outside of consolidation. If the volume is declining during the coarse of the consolidation and a volume spike on the candle close outside of the consolidation supports the fact that more traders are interested in the move. Look for the spike to be 100% of the average volume to enter a full sized position. You can enter a ½ sized position if there is at least 75% of the average volume. Use a 20 period simple moving average on the volume so it represents about a month of volume data on most markets.
4. If You Get Head-Faked, Close the Trade. You will eventually get caught in one. If you get a candle close back inside the consolidation, close the trade. You may have another opportunity to get back into the trade from a real breakout. Don't immediately give up on it. Especially if you see the volume and atr/volatility continue to decline. Taking a small loss early on will help you make it up on the real breakout.
