Everything That You Need to Know About False Breaks

One of the most important things that you need to have if you want to succeed in the trading is to understand the markets completely. Amateurs in the stock market tend to fall for some obvious traps that professionals are keenly aware of. In fact some of the traps that are created in the market are a result of the fact that amateurs do not understand these aspects of the market and jump in to trade at the wrong times.

If you want to make sure that you avoid these traps and false breaks, you need to understand the various kinds that exist so that you can avoid them like the professionals and the big players. Typically a false break is a move that sucks in the over committed side. What happens is that the market seems to commit to one side of the trade and a large number of open players enter the market. Once the side of the market becomes over-saturated, people are forced to liquidate their holdings due to the opposite trend that ensues. It is the herd mentality that causes these false breaks to occur in the first place but people continue to find some kind of solace in the trend that everyone is following.

The Top Three Types of False Breaks

If you can understand the various kinds of false breaks that can happen in the market, you will be in a better position to spot them and void them completely. There are essentially three types of false breaks that are most common. These have been discussed below.

1. Bull and Bear Trap – A bull trap is called the bar trap. In this false break there is a 1 to 4 bar pattern that emerges. It is defined by a false break in the key market level. As the key level approaches, people wait to see the manner in which the movement is happening. As the key level is approached aggressively, everyone feels that the key level will break out. The market fakes people out in the case of a bull trap. This happens especially when the big boys enter the scene as soon as the market breaks out. The issue is that the entrance of the big boys sometimes makes the market swing in the opposite direction and fall is often lower than before leading to amateurs who are stuck with long term losses.
2. Consolidation false break – This is the false break associated with trading ranges. Many times people feel that the trading range will break out in this trend based on the speed and manner in which it approaches the lower or higher end of the range. Many times the trading range is not broken and the asset falls within the range as per norm. A good way to avoid this false break is to wait till the asset closes beyond the trading range on the daily chart.
3. Inside bar – This is a price action setup that is extremely interesting. This price action pattern needs a false break of inside bar setup. As a trader you need to watch out for a false break in the inside bar and the mother bar too.