Identifying false breakouts in intra-day trading

Identifying false breakouts in intra-day trading

"The stock market is a tool for transferring wealth, not creating it." - Tom Dyson

False breakouts are a common occurrence in intra-day trading, where a trader thinks that the market is breaking out of a particular price level, but the price quickly reverses back. False breakouts can be frustrating and can lead to financial losses. Here are some tips on how to identify false breakouts in intra-day trading:

1. Volume: One of the key indicators of a false breakout is low volume. If a market is breaking out of a price level, but the volume is low, it may indicate that the breakout is not genuine and may quickly reverse back.
2. Time: Time can also be an indicator of a false breakout. If a market breaks out of a price level but quickly reverses back within a short period of time, it may indicate that the breakout is not genuine.
3. Support and resistance levels: Support and resistance levels are key areas that traders look at when identifying breakouts. If a market breaks through a support or resistance level but quickly reverses back, it may indicate that the breakout was not genuine and that the support or resistance level is still valid.
4. Price action: Price action can also be an indicator of a false breakout. If the price quickly reverses back after a breakout, it may indicate that the breakout was not genuine and that the price is likely to continue trading within the existing range.
5. News and events: News and events can also impact the validity of a breakout. If a market breaks out of a price level but quickly reverses back after a news event, it may indicate that the breakout was not genuine and that the market is still reacting to the news.

In summary, false breakouts are a common occurrence in intra-day trading, but they can be identified by looking at volume, time, support and resistance levels, price action, and news and events. By being aware of these indicators, traders can avoid making poor trading decisions based on false breakouts and increase their chances of success in this fast-paced and dynamic market.