In previous articles we have covered price action setups that traders can use to enter the market. Today’s article is going to cover a pattern in Forex the traders can use to be on the right side of the market. Many of the price action entry signals we have discussed in previous articles can also be used in conjunction with this pattern to create a high probability trade setup.
The False Break
The basic psychology behind the false break is quite simple. Many traders are always on the hunt for breakout setups. This is where the market breaks out of a support or resistance level. Traders trading the breakout will set order on the break either higher or lower and look to make profit from the market continuing in the breakout direction.
Many times however the market will breakout slightly before shooting back in the opposite direction. This pattern is known as a false break. The traders who entered on the breakout setup will have their stops taken out as the market whips back the opposite way.
Traders can take advantage of this false break and enter on the right side of the move rather than being stopped out with all the breakout players. Trading this way is known as taking the contrarian approach or in other words doing things differently to the rest of the pack.
Example of a False Break
Note in this example how price had found support. When price next tested this support it broke through to start with. This was the false break. A lot of traders would have had their trades activated looking for price to break out lower. The contrarian traders could have waited for the market to play its hand before jumping in and trading the market back higher.
Using Price Action Reversals to Trade False Breaks
In previous articles we have covered two reversal signals the Pin Bar and the Engulfing Bar. Traders can use these two reversal signals at the false break area to dramatically increase their chances of placing a winning trade.
Example of Pin Bar Creating False Break
The following example shows a Pin Bar creating a false break out of resistance. Traders could have waited for this false break to occur before entering the Pin Bar short.
Example of Engulfing Bar Creating False Break
The following example shows how a trade can use an Engulfing Bar to enter false breaks to increase their probability. Note how price broke below the support area before whipping back the other way creating a Bullish Engulfing Bar.
False breaks are a great way for traders to enter and get on the right side of the market. Instead of entering blindly on a break out traders can wait for the market to show its hand and then move in line with the contrarian traders back the other way.
Combining other signals at false break levels is a way for a trader to not only increase their winning trade chances but also define their risk.
For more info on the Price Action reversal signals covered in this article please see previous articles.
Like all things in trading Forex, do not just go straight into trading live. Practice trading on a demo account until you have proved you can make money consistently and then and only then consider going live.
