But in its development, the reality is often different markets. Prices' could break moment too soon reversed course again (bouncing) or false breakout occurred. Traders who use this moment of entry can be called contrarian traders, and the way in which so-called contrarian trading. Trading with false breakout is one way in contrarian trading.
Contrarian trading can be done for example by looking for opportunities entry buy when the price movement down or opportunity sell when the price is considered to have been overvalued or too expensive, of course, after adjusting for the possibility of a reversal of the direction of the trend (trend reversal) through confirmation of technical indicators or formation of price action formed.
If by chance you like to use a breakout strategy may have experienced when you have an entry below support or above the resistance level when prices break through, it suddenly reversed direction of price movement. There are several reasons why the market failed to break out, which seems clear is the declining momentum shortly after the price managed to break. At this critical level occurred a battle between the big players, namely central banks, financial institutions and the big boys.
If the central bank does not want the price through a certain level it will soon double the lot size (position size), and if the big boys feel less supported, or was not strong enough against the central bank, then they will go with the flow, entry on the direction reversal, Hence the importance of the levels of price movements will slide quickly and sharply as the momentum is very strong, both when the break and when reversed (false breakout).
For example, the following false breakout on a bullish trend, that prevailed in the price movement of GBP/USD daily. In early November 2007 the GBP/USD managed to penetrate the level of 2.1050, 50 pips above the psychological level of 2.1. Please note Pound has never reached 2 per US dollar since its formation in March 1993. After forming a bearish engulfing candlestick bar, then pound-dollar slumped to the level of 1.5 a year later (November 2008), 6000 pips from a false breakout. Note the market sentiment in the days that followed that tends to bearish.
Another example of the popular currency pairs EUR / USD. In the following weekly chart appear to have happened several false breakout on a bullish or bearish trend, at levels round number.
Note the stronger the resistance or support level then the stronger the movement direction reversal that followed.
In the forex market a false breakout is more common given the general market conditions which actually trending only about 20% to 30% of the price movement. Therefore this strategy is quite popular in forex trading.
Breakout and a false breakout in sideways condition
False breakout condition often occurs in a sideways market (ranging), as in the following example:
Here seen 4 times a false breakout, 2 times the level of resistance and 2 times the level of support. Traders who are familiar with the analysis of price action can certainly anticipate the formation bar formed, the pin bar, inside bar or a doji. With the setup observations confirm price action and technical indicators will be known whether the conditions have been perfect breakout or not.
To be safe, contrarian traders will tend to use a limit order to an area close to the level of resistance or support, which limit sell at area 2 and 4, and limit buy-in area 1 and 3. Being aggressive traders will utilize the breakout perfect condition with stop order, the stop buy at area 2 or 4, and stop short at area 1 or 3. As shown in the example above, a perfect breakout occurred after 4 times false.
However, pending orders as it is not necessarily safe, and more speculative because we do not know for sure the flow behavior of prices (order flow) at levels that we place the order. To be objective, we must know the behavior of the overall price movements by reference to the higher time frame to determine the dominant trend at the moment. If the dominant uptrend then sideways circumstances will tend to break out at resistance, and vice versa if the dominant downtrend.
Next we see the bar candlestick formation and price action setups around the level of resistance and support. In the example above, the first looks inside bar area followed by a doji, suggesting a strong market consolidation. There was also a rejection on the level of support. We can entry buy when the mother highest level bar has passed. In the second area looks pin bar and inside bar as well as rejection at resistance. This shows that the market is consolidating after the price to test the resistance level. Entry sell can be done when the mother lowest level bar has been penetrated, likewise in area 4.
False breakout on the psychological level
Another example is a false breakout that often occur at the psychological level, as follows:
In trading with the false breakout we should not rush to entry. Wait until the way is clear market sentiment.
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