Haunted by False Breaks? There’s One Thing You Shouldn’t Do



You place a buy order above the current range and catch the break. The pair moves higher, but doesn’t get too far, retreats quickly back to range and catches your stop loss. It then makes the break once again, but this time with full force, moving significantly higher and reaching your previous Take Profit point.

Sounds familiar? For some, this is too familiar. What can you do about it? The answers vary, but there’s clearly something you shouldn’t do.

The scenario described above can happen in the other direction as well – when you enter a short on a break only to see an initial false downwards break that catches your short position, but not for long.

Here are some things you can ask yourself:

  • Range: Was the pair indeed trading in a distinct range? Perhaps the whole trade idea was based on a range that wasn’t distinct enough.
  • Safe distance: Was your order far enough from the range? Perhaps you caught a small dip on low volume that was later corrected.
  • Channel?: Is the pair moving in an upwards or downwards channel? Perhaps you were looking into a flat range while there was a trend lower or higher.
  • Bigger Picture: Did the break coincide with a long term trend, or did it go in the opposite direction? When this is a counter trend, it is more tricky.

After checking all these things, you are certain that you made the right decision with the correct parameters, and still lost the trade. Well, this happens in many cases.

The first break is not the real one.

In many cases, new ground is tested briefly before the real move. In order to protect yourself, a smaller position size is a great solution, that will reduce the loss potential.

The second break already has better chances of succeeding, and a normal position is size can make more sense. As always, be careful!

What shouldn’t you do? Do NOT move your stops.

It may be a false break with no real break to follow up on it. If this is the case, you’ll just lose more. And if it does accidentally work once, you’ll develop a bad habit that can open the door to huge losses in the future.

Do you experience false breaks? Do you have any tips to share?

Further reading: 5 Most Predictable Currency Pairs




About

Yohay Elam – Founder, Writer and Editor

I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me.

Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

7 Comments

  1. nice tips… especially in the current market. thank you!!

  2. Helder says:

    You can create two strategies that complement eachother. One that profits from false breaks, which occur more frequently than breakouts, and one that profits from breakouts. The secret is “complement eachother”, risk wise and profit wise.

  3. Dave says:

    It’s far too simplistic to say “don’t move stops”. Brokers love stops losses and many firms will have profited massively from the recent volatility because stops are being triggered so often.

    Reduce leverage, take smaller positions and widen stops – That is another sensible option.

  4. Eddy says:

    Dear Helder,

    Thanks for the advise, but how do you know if it is a false or a real break out. As for instance this morning are the stock futures and UR/USD having a false or real break out.
    Happy to learn more from you and Forex Crunch !

    Thanks again,
    Eddy

    • Helder says:

      Hello Eddy,

      The answer to your question is: You don’t! There is no way one can know with 100% guarantee if any move will become a full blown breakout or just a false attempt.

      The answer to your question will depend on the profit target of you breakout strategy. For instance, lets assume that your profit target is 600 pips. In other words, your strategy says that a real breakout occurs when it reaches 600 pips. A false breakout will be one that, for instance, only reaches 250 or 300 pips.

      Attention, what seems to be a false breakout can turn into a full blown breakout. It’s all about playing as safe as possible, and have different strategies for different market scenarios. You can then add a third strategy that will profit from range movements, in other words, while you wait to profit from false and real breakouts.

      Just remember that what you consider a breakout or not will depend on your profit targets, which will have to be set in accordance to the market you are trading. Not every market makes 600 pips breakouts.

      Hope this can help you. Good luck!

  5. Michael says:

    This type of advice is the nuts and bolts of trading and really is useful, typical of your site and noticably missing from so many others.

  6. L. C. Chong says:

    For me, when I trade breakout, I am looking for trend extension.

    The safer way is
    1. Bullish breakout – wait for the price to form a support.
    2. Bearish breakout – wait for the price to form a resistance.

    You might miss a big move, but considering that this method can reduce trading false breakout.

    I rather choose to regret rather than taking unnecessary risks. After all, opportunity is always out there.

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