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Risk Disclaimer: Trading is risky! Never trade money you can not afford to lose! Site content is only personal opinion and never a Trade Recommendation! Futhermore the blog content needs to get reviewed to analyse whether it is up-to-date and still appropriate in the authors view.

Breakout Trading

True and False Price Breakout


see also Continuation chart patterns


False First Breakout



The first breakout through a striking level with is most often a false breakout so that not only the stop orders at the striking price level get triggered (stop running) but also the stop orders of some breakout traders, who entered at the breakout of the important chart level. The true breakout might or might not occur depending on the intention of the market manipulator. The false first breakout often occurs with time frames / candle duration of 1 hour and above, where arguably more breakout traders try to catch a breakout than on smaller time frames. But it is usually also visible on smaller time frames. So, the false first breakout is aimed to fool the breakout traders, see also Forex Price Manipulation.

If the first breakout is not immediately retraced back to catch the stops of the triggered limit orders of the breakout traders then most often price is retracing back to the breakout level later, particular after another important stop level got cleared.

The market price manipulation is working against popular trading strategies and ensures that the chances to gain profits in trading remains low ("no free lunch"). In regards of this, the popular mainstream strategy to let winning trades run and to use small stops seem to be questionable if market often retests the breakout level to clear the stops of the breakout traders.

The false first breakout is also aimed to fool some breakout traders who are using momentum trading strategies/ filter strategies. Momentum traders are often entering the market after a strong surge in momentum/ strong recent candle at the top/ low of the candle with a limit order while often using a small stop. So, a false first breakout through the high/ low of the the momentum candle is aimed to catch the stops of these breakout traders.


Breakout Timing



Market often breaks Support/ Resistance either for a true price breakout or false price breakout/ shake out (stop fishing) with the beginning of a new candle of the higher time frame particularly if the previous candle of the higher time frame closed at support (with a bearish candle) or at resistance (with a bullish candle). The new candle then often penetrates the level for a new low/ high particularly within the beginning of the new candle (e.g. hourly/ 4-hourly, daily but also 5 min candles..)

In another way, if a strong bullish or weak bearish candle closed at resistance/ support then the next candle is likely to break this level for a true or false price breakout. Before the true breakout occurs market most often retraces back slightly to catch the stops of the breakout traders. A true breakout is more likely to occur if market already cleared the breakout limit orders above a striking level - see also Forex Price Manipulation.



What Time Zone to use


London Time Zone (GMT +0 / GMT +1) is recommended for Forex Trading (Considering 4 hour and daily candle chart) and for the calculation of Pivot Points



Breakout Trading



Some Examples for Breakout Trading in regards of Timing


Example:

On the 5 min chart (below) we see the three wave/ triangle consolidation (red circle), which is visible as a bear flag on the 1 hour chart. The green circle shows a small bear flag prior to the breach of yesterday's low (red line) with the beginning of the new hourly candle at 11 a.m. (Timing). The blue circle on the 5 min chart shows another bear flag which got triggered with the beginning of the new 4-hour candle at 12 a.m. (Timing setup).


Timing setup in trading
Breakout Timing setup


Another one:
See thick red ellipses (below). The 4-hour candle closed at resistance (respecting the falling trend line) and broke through it with the next 4-hour candle (Timing setup).


Timing setup in trading/ triangle breakout
Breakout Timing setup in Trading/ Triangle breakout



Timing trendline break
Trendline Break Timing
On the 4-hour chart (left)  we see that the Euro touched (respected) the daily trendline (red) with the closing of the 4-hour candle at 4 p.m.. The Euro initially dropped further with the beginning of the new  4-hour candle starting at 4 p.m. (Timing) and the Euro penetrated the low of the 18th of June (green line).

On the 1 hour EUR/USD chart below (last 10 candlesticks) we see how market closed at support and breached it with the beginning of the new hourly candle (Timing setup- red ellipses, market closed at each support level (10 SMA, 20 SMA and daily pivot point ) and broke through it with the new hourly candle). The repeated pattern of a bearish candle close at a support level and the following break of this support level with the beginning of a new candle occurs often in a strong bearish trend or a surge in downside momentum.


strong trend/ momentum
1 hour strong trend/ momentum


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