The marketplace is a battlefield, a war between buyers and sellers. Sometimes the buyers win, sometimes the sellers win.
But most times they are of equal strengths, there is no winner or loser. I’m referring to a consolidating market.
In war books, war documentaries and movies, the generals or warlords are constantly planning on how to defeat their enemies. During the battle, it reaches a point where one can tell who will win the battle. When the battle is over the victorious one advances further to capture more territories. The losers fall dead while the survivals surrender to defeat.
A trader is like a general or warlord planning to win in the battlefield. Your trading chart is a battlefield.
In the marketplace whenever there is a market consolidation, the buyers and sellers are of equal strengths. No one is winning, no one is losing. Market consolidation can happen in a volatile market or trending market.
The market can breakout from this consolidation providing opportunities for breakout/momentum traders. Price can breakout higher or lower either continuing the trend or causing a market reversal.
There are techniques used to tell when a breakout will occur which I have discussed below.
What is a breakout?
A breakout is when price breaks with a strong momentum candle or bar above a resistance level or below a support level. An example of a breakout is shown below.
What is a false breakout?
A false breakout is when a breakout occurs but instead of continuing, price enters back into the consolidation area. False breakout is one of the tricks of the big boys.
They utilize false breakout to provide liquidity for their positions.
What are the 3 expert ways to avoid these false breakouts?
Note: These techniques should be traded according to the market structure of the asset class you are analyzing.
⦁ Breakout and retest
When a breakout from a level occurs, there is a retest on that same level. There are variations of this retest. They occur as continuation patterns (a flag pattern or a wedge). Be careful of that retest the big players may be setting a trap. So be conversant with your candlestick patterns and multiple timeframes. They will save you from bad trades.
Note: Sometimes price breaks out without the retest happening.
⦁ Ascending and descending chart patterns
In an ascending chart pattern price makes equal highs and higher lows. This signifies that the bears are weak, the bulls are picking up strength and gathering momentum. It is likely price will break higher.
For a descending chart pattern price makes equal lows and lower highs which signifies that the bulls are weak and the bears are gathering momentum. If price break lower. It is a significant sell.
⦁ Failed attempts
When price moves to a resistance and sellers could not push the price down. It makes a second attempt and still cannot push the price down. The second attempt could not break the previous low. Then it means that the sellers are weak at the resistance level. It is likely a bullish breakout will occur. If it eventually breaks out, it is a good buy.
When price moves to a support level and buyers cannot push the price up. It makes a second attempt and still fails to push the price up. Price could not break the previous high. Then the buyers are weak at that level. If price breaks lower. It is a significant breakout.
Note: There must be at least two failed attempts or more. If so, the better because such scenario signifies weakness.