What are the reasons behind the fake / false breakout?

False break-out usually happens because of an unsudden change of market sentiment. Market sentiment can change for many reasons.

What do you think why market sentiment change suddenly?
Is there any other reason that can create fake or false breaks out?

As a breakout of a S&D zone only occurs c.40% of the time, it’s not reliable without confirmation. Chart candles help. So does MACD and PSAR.

Also, market sentiment is often controlled by inertia. The majoritiy cannot be bothered.

It’s quite possible the lines you are looking at to determine resistance are in fact random in nature and the market does not really care a hoot for them.

Not saying it’s true all the time, but trying to read too much into any single failed pattern is not a healthy road to go down.

If you link every false break out or failed trade to changes in sentiment, the nonfarm payrolls, or your evil broker fading your position you will eventually start trying to add “credible evidence” that this or that breakout is more likely to work than another.

And that will likely interfere with trading results.

Like it or not, there is always an element of randomness in the market that we must learn to accept.

4 Likes

Breakout means momentum. It needs fuel, and you can see the “fuel meter” in volume.
If move after breakout is volatile but misses the fuel - it may be a false breakout or even it was a false level :slight_smile: what we understand as SR level (or zone) is a price (price range) where extra supply or demand is kicking in. At level you will see, if market is realizing profits and momentum drops or if market is pumped and ready to break the supply/demand caused by these who are jumping out or jumping in for a bounce from the level.

So volume profile before and after the break tells a story. At some point retest may come caused by these who realized profits (you will see move with lower volume against the breakout). False breakout can be caused by institutional traders who pumps the demand just to have better price for their shorts (high volume drop) OR by snowball effect if too much traders take profits after the break - what should be a retest is in fact a strong move driven by emotions (lower volume drop - dryout).

EDIT Adding a chart to visualize above:

There is a false breakout on USDCAD. What I consider as red flags to trade it. Last retest gained in volume. It means, that if level is at risk - there was large demand ready to jump in. Previous bearish move lacked the fuel - volume was dropping. Even move which broker the level was with insignificant dropping volume. Supply is weak - this is not a battle won with demand, so most likely momentum will not appear from thin air.

3 Likes


Particularly pay attention to following lines in the text: “This usually is caused by the institutional traders who want to scrape money from the hands of individual traders.”

1 Like