How to trade in a volatile range is a problem that trend traders find very troublesome. They often get stopped out, and then the market reverses. They think the trend has reversed and chase in, only to get stopped out again. Today, using $BTC live trading, I will explain the best trading strategy for range consolidation - the 2B structure false breakout reversal strategy.
Before starting, let’s first popularize what a 2B structure false breakout is. As the name suggests, 2B means two Breakouts. When the market is in an uptrend, if the price breaks a new high (the first breakout) but cannot sustain it and even turns back down below the previous high (the second breakout), it indicates that the trend may turn down. The same applies to a downtrend.
Taking the current BTC 1-hour candlestick chart as an example.
It can be seen that within this hourly range, BTC has experienced three false breakouts. Each time a false breakout occurred, the price reversed from the bottom of the range to the top or from the top to the bottom. There is no better risk-reward ratio than this.
Let’s interpret the chart and the logic behind the 2B false breakout trading.
Initially, the coin price reaches the top of the falling channel and is blocked, causing the trend to start reversing.
Then it hits the support of the falling channel and begins to pull back, forming a previous low.
Then the price is blocked again at the top of the falling channel and begins to fall. The falling channel may not have been very obvious at first, but at this point, the falling channel is already very clear.
From the chart, it can be seen that there is a resonant support level at the falling channel and the neckline at the daily level. I placed a long order at 100700 here two days in advance, with a stop loss set at 500 points.
After the price hit 1003, it quickly retraced. Several large bullish candles broke through the previous low with volume, forming a 2B structure. Increased position here, and at this time, move the stop loss slightly below the previous low and continue to look up.
The future price movement will be discussed later; this article mainly talks about false breakouts and true reversals.
Through this case, it can be seen that the best method for trading false breakouts is to take a light position on the left side, increase the position on the right when the 2B structure forms, and the stop loss only needs to be placed below the previous low. If it breaks out effectively, then move the stop loss up and hold.
It is important to note how we enter positions on the left side. We usually choose to place orders near the next support/resistance. When we are far from the next support or resistance, we can observe the liquidity distribution. Generally, after the market completes liquidity grabbing, it starts to reverse. False breakouts are meant to lure in long and short positions to trap retail investors. Additionally, we can directly observe the candlestick patterns. We can see that there is a very long lower shadow hammer candlestick at the bottom, which indicates a reversal. Moreover, the volume is sufficient, and retail investors are panic selling while the main players are accumulating. The following momentum is also strong, so we can enter the market.
For some beginners, it may still be difficult to judge false breakouts. I have summarized the following key elements to assist in judgment.
Key elements for identifying false breakouts:
It must be at a key position on a wave or a higher level, such as the top and bottom of a range and key support and resistance levels.
After the price breaks out, it is best to quickly pull back (but a rapid pullback is not necessary for a false breakout; a false breakout can be 2B, 3B, or 4B), or it may go down in a range.
Trading volume: Key candlesticks are accompanied by increased volume, for instance, in a bearish market's false breakout, retail investors are panic selling in large numbers, while the main players begin to absorb these chips, leading to a surge in trading volume.
Divergence: RSI and MACD often show divergence during false breakouts.
Market sentiment: Market sentiment is always a chip that the main players need to use.
When the market is filled with fear, it often indicates that a rally is about to happen. When the market is filled with FOMO, it often indicates that a crash is about to occur.
Historically,
When the Fear and Greed Index is above 85, the probability of a crash is 95%.
When the Fear and Greed Index is below 20, the probability of a rally is 95%.
Yes, you read that right; trading is this counterintuitive.
Note, these are not the key conditions for a false breakout, but can assist you in judgment. Having these conditions does not guarantee a false breakout, and you must always place a stop loss when trading.
