What exactly are the signs of a false breakout?
I’m going to be brutally honest, if anyone knew that, they’d be a billionaire!
The best that we can hope to do is pick up on what institutional traders are doing quick enough to avoid taking too much damage on a false breakout.
The quickest way to pick up a false breakout is to watch the volume. The chart below is of a classic false breakout pattern.
Signs Of False Breakout
1) A real breakout should have a huge volume surge coming directly out of the pattern, in this case an Ascending Triangle pattern. Notice the obvious absence of a huge volume surge.
2) The volume should continue to rise for 2 or more days after the breakout before the first retracement. Notice that the volume rose a single day and then immediately began to fall. This spelled doom for the breakout.
3) The candlesticks should have shaven tops. Notice the long shadows on 5 candlesticks. These shadows were caused by institutions and individual traders fading the breakout. Each day, the bears gained more and more confidence that the bulls could not hold the breakout.
Learning how to quickly spot a false breakout can make you a lot of money or at the very least stop you from losing a lot of money. Leave any comments you might have below. Thank you and happy improved trading.
Lance Jepsen
President, GuerillaStockTrading.com
Your Trading Coach
(because everyone, even Tiger Woods, needs a coach)
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