What is a False Breakout? A false breakout is when price temporarily moves above or below a key support or resistance level, but then later retreats back to the same side as it started. This is the worst case scenario for a breakout trader that enters in a trade as soon as price breaks.
False Breakouts simply means trading in the opposite direction of the breakout.
if you believe that a breakout from a support or resistance level is false and unable to keep moving in the same direction.
In cases in which the support or resistance level broken is significant, fake breakouts may prove to be smarter than trading the breakout.
Support and resistance levels are supposed to be price floors and ceilings. If these levels are broken, one would expect for price to continue in the same direction as the breakage.
If a support level is broken, that means that the general price movement is downwards and people are more likely to sell than buy.
Conversely, if a resistance level is broken, then the crowd believes that price is more likely to rally even higher and will tend to buy rather than sell.
Independent retail forex traders have greedy mentalities. They believe in trading in the direction of the breakout. They believe in huge gains on huge moves. Catch the big fish.
What does in fact happen is that most breakouts FAIL.
Breakouts fail simply because the smart minority has to make money off the majority.
However, if everyone wants to buy above a resistance level or sell below a support level, the market maker has to take the other side!
Retail traders like to trade breakouts.
The smart minority, the institutional, more seasoned traders, prefer to fade breakouts.
The smarter forex traders take advantage of the collective thinking of the crowd or inexperienced traders and win at their expense.
That is why trading alongside the more experienced forex traders could be very profitable as well.