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Sunday, March 9, 2014
Monday, March 3, 2014
How to Trade False Breakout?
Abstract from Terraseed Binni Ong
Hang Seng Index did a breakout on 28 February and then immediately performed a U-turn. What happened?
This is a common phenomenon in Index Futures and Forex Trading. It is called a false breakout and can be a valuable short signal (in this example where price broke to the top).
To understand false breakout, it is a move where big players can kill two birds with one stone. Shorts who entered early upon seeing resistance are stopped out of their positions when price breaks North. Longs who jumped to play breakout are stopped our of their position when price breaks South again.
The key to trading this:
1. Never play breakout. This prevents one from getting killed by a false break.
2. Assume a false break WILL happen. Therefore do not enter a short early (since it is going to get killed). Enter a short after price breaks and makes U-turn.
Hang Seng Index did a breakout on 28 February and then immediately performed a U-turn. What happened?
This is a common phenomenon in Index Futures and Forex Trading. It is called a false breakout and can be a valuable short signal (in this example where price broke to the top).
To understand false breakout, it is a move where big players can kill two birds with one stone. Shorts who entered early upon seeing resistance are stopped out of their positions when price breaks North. Longs who jumped to play breakout are stopped our of their position when price breaks South again.
The key to trading this:
1. Never play breakout. This prevents one from getting killed by a false break.
2. Assume a false break WILL happen. Therefore do not enter a short early (since it is going to get killed). Enter a short after price breaks and makes U-turn.
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