How to Avoid False Breakouts (My Secret Technique)

Ahhh breakout strategies. Setting a support line, then a resistance line, and waiting for that one moment to happen. When the price suddenly breaks through.

And when it breaks through, it really breaks through. But how do you trade this strategy successfully? Is there even a strategy?

Are there any secrets? Well yes, there s a couple. And lucky for you, I m about to share them in this video.

Lets not waste any time. Let s get straight to it. Has this ever happened you?

You set your support line, you set your resistance line, and wait for a breakout to happen. Once you see that the price suddenly breaks through your resistance, you enter a trade extremely excited, because you are prepared for a huge jump in price. You get your popcorn, sit down, stare at your monitor, but then suddenly, The price reverses and dips.

You stare at your screen confused on what just happened, and you portfolio just tanked. Well, I m going to teach you a secret so this never happens to you again. So the first question we need to ask ourselves, is what is a breakout?

Well a breakout is when you have a support and resistance, where there are multiple key rejections for both. The actual breakout happens when the price bursts through one of the key levels. And notice what happens, when the price does break through, it starts soaring.

Making this point right here, a great entry point. But the question is, how do we find setups like this, where the market could potentially have a breakout? The answer is breakout patterns.

I m sure you ve all seen these before, but there are multiple key breakout patterns you should have in the back of your head when trading. There s the wedge, flag, rectangle, triangle, and pennant. Now the problem I see a lot of people doing, is they are looking for the exact price action that is in the pattern image.

The price will rarely mimic this exact pattern, if ever. So your not exactly looking for the exact price action that happens in the image, your looking for the key support and resistance levels that make that pattern. Now to be honest, it doesn t matter which pattern you get.

Hell, you don t even memorize the names of the patterns. The key thing you have to take away from this is that all these patterns have something in common. The price consolidates, making two key levels, then eventually breaks out.

So here, we found price movement that looks as if it has multiple key points of support and resistance. The more key points, the better. We acknowledge this is happening so put a support and resistance line, making a rectangle pattern.

So far so good, but this is the point where people usually make the mistake. So what happens is people usually wait for a breakout in either direction. So once someone sees the price break through their resistance line, they immediately enter the trade, but it turns out, it was a false breakout, and the price reverses in the opposite direction.

This specific trader, would have lost a pretty decent amount of money. I m going to show you how to prevent this from happening, so we go in with a greater chance of the price going the direction we want it to. The first thing we need to understand is what is called momentum candles .

Momentum candles can have many forms, but usually it s one big candle, with a large body. Or 3 medium sized candles, all going in the same directions. These two forms of momentum candles are going to be what we are looking for.

Let me show you an example. So in this example we have a set of multiple higher highs, so we can set a resistance level right here. Then we have a key support level right here, because the price reversed multiple times at this level.

And now we wait. We see a pretty decent sized candle form and break the resistance level. The problem is, only the tip of it broke out, so we are not counting this as a momentum candle.

For us to be able to count this as a momentum candle, the majority of the body would have had to be crossing the resistance level. We would also consider this a momentum candle if another green candle appears outside of the line, like this. But, unfortunately it was a red candle instead, so we ignore this signal.

And look what happened, it was a false breakout. Let me show you another example. So here, we have our support and resistance levels set up, the price moves, and a decent sized candle breaks through our resistance.

It s not a momentum candle, because it does not have a big body, so we wait for further confirmation. A second candle appears, but it s still a pretty small candle. And as we said before, we will only count it as momentum candle, if it has a huge body, or there are three green candle.

So we wait again. Then a 3rd green candle pops up, which is an extremely bullish sign. So, this when we enter the trade.

Now, there are three different scenarios that could happen. The price keeps going up from here. The price goes back down to the resistance level, and bounces off.

Or, the price breaks through the resistance level, and falls back down and counts this as a false breakout. So what should we do? Should we wait for a pullback to happen?

OR should we enter the trade right now? Well what I like to do, is setup a strategy, so the odds are in my favor no matter what the outcome is. Rather than wait for a pullback, I m going to enter the trade at the close of this momentum candle.

Then, I will set my stop loss right below the resistance level. This way, if the price does end up doing a pullback and bouncing off my resistance level, it doesn t reach my stop loss, and I still make profit. Or if the price decides to go straight up from here, I m in the trade.

Considering this candle right here, is a momentum candle, it s a very low chance that this is a false breakout. But in the off chance it were, I have a stop loss in case the price decided to drop. Now that we have our entry point, we need to figure out an exit strategy.

With breakouts, they tend to have large upsides. So if we decided to do just the normal 1. 5 ratio, we would be missing out on a lot of profit.

To make sure we are taking advantage of the huge profits, is to use what I like to call, the 2 step take profit system. This is how it works. First, you find your entry signal, then put the stop loss below the resistance line, then we are going to set our take profit line at a 1.

5 ratio. Once the price hits our take profit mark, we sell half of our shares to guarantee that profit. The other half will stay in the game.

Next, we will raise our stop loss to our previous take profit mark. Then our next take profit mark will be declared by an indicator, that indicator is the chandelier indicator. To add this indicator, just go to trading view, go the indicators tab, and type in chandelier stop .

Then go to the indicators settings, and change the ATR multiplier to 2. This will give us our exit strategy. It s very simple.

We sold half of our shares at the 1. 5 profit mark. We let the other half run.

we set our new stop loss at our old take profit mark, and we will exit the trade once the chandelier indicator changes colors. So right here, we would of sold the remaining of our position. Notice all of the extra profit we made, by only selling half of our shares.

If we would of sold all of our shares at the 1. 5 profit mark, we would of missed out on a lot upside. You can also see the price went straight up right away, without forming a pullback.

This is why I like to enter the trade right away, because most breakouts will go straight up, without forming a pullback. Let s see one more example. We find some key points that are great levels to make a support and resistance.

Once we set our trend lines, we wait for a momentum candle to break through our resistance. One candle breaks, but it does not have a big body, so we wait for two more green candles. Once we see the three candles, we enter the trade.

We then put our stop loss below the resistance line, and the set our take profit to a 1. 5 ratio. We then wait for the price to hit our take profit, then we sell half our shares.

After we sold half of our shares, we move our stop loss to our old take profit mark, then we turn on the chandelier indicator. We Then wait to sell the other half of our shares, until the chandelier indicator turns colors. Once it does, we exit the trade.

I just show you some secrets to make your break out trading that much better. All I ask in return, is if you take 2 seconds out of your day and like this video. If you want to see part 2 of this video, and make this strategy even more profitable, check out this video.

Thanks for watching, and ill see you guys, next time.