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FAKE BREAKOUTS: HOW TO AVOID BEING LED BY MARKET EMOTIONS

In a range-bound market, another challenge is the “fake breakout.” The price may briefly break through a support or resistance level but quickly return within the range. This often misleads traders into thinking the market is changing direction. To avoid this, we can take the following steps:

Confirming the Validity of a Breakout：

When the price breaks through support or resistance, the first thing to do is confirm whether the breakout is real. Generally, a breakout accompanied by a significant volume is more likely to be valid, whereas if the volume is low and the price cannot sustain the breakout, it might be a fake breakout.

Wait for a Pullback to Confirm：

After a breakout, don’t rush to enter. Wait for the price to pull back to the breakout level. If the price fails to continue in the breakout direction, you can treat it as a failed breakout and consider taking the opposite position, such as shorting.

Set Tight Stop-Losses：

If you decide to enter after a breakout, set tight stop-loss levels to limit your risk. If the breakout turns out to be fake, your stop-loss will help you exit promptly and avoid larger losses.