$ETH

Stock Price Behavior Analysis Course

Lesson Twelve: Identification and Response Strategies for False Breaks

Many traders immediately chase orders after a price breaks through a key area, only to find that the market quickly reverses; this phenomenon is called a false break. Today, we will learn how to identify, avoid, and respond to this common trap.

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1. What is a false break?

A false break refers to:

The price briefly crosses support/resistance but does not continue with momentum, instead quickly retracting back into the range, resulting in a failed bullish (or bearish) trap.

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2. Characteristics of a false break

1. Insufficient momentum of the breakout candle:

Typically small in body or with obvious wicks, indicating market hesitation.

2. Lack of volume confirmation:

Volume decreases instead of increases, indicating that market participants do not agree with this breakout.

3. Rapid pullback after the breakout:

The price quickly returns to the original range, even creating new highs or lows in the opposite direction.

4. Commonly occurs at the end of consolidation, after key news, or during a major player’s washout.

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3. Response strategies

• Do not chase the first breakout candle; wait for a close confirmation or effective retest.

• Set stop losses quickly; exit immediately if the breakout fails.

• Conservatives may adopt the 'enter on false break' strategy: wait for a false break to occur, and then trade in the opposite direction, following the market's 'deceptive intention'.

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The occurrence of a false break is essentially a failure of 'market testing'. Understanding how to identify and respond can significantly reduce the chances of loss.