false breakout
A breakout that reverses back into the old range, trapping those who entered late.
A false breakout is a move beyond a support or resistance area that reverses back into the old range. It can leave people who acted late exposed to a quick move the other way.
The label is easiest to apply after price returns inside the range; at the moment of the first move, the outcome is not known. Even a move that stays outside for a while may later reverse. The term describes what happened, not a reliable way to predict it.
Example
Northwind Foods has an observed resistance area of $20–$21. A candle closes at $21.50, or $0.50 above the area. The next candle closes at $20.80, which is back inside the area because $20 ≤ $20.80 ≤ $21. Under this example's rule, the first move is later classified as a false breakout. It could only be named that after the return became visible.
Common mistakes
- Labeling a breakout false before the price has returned. The future outcome is not yet known.
- Assuming every return inside the range will be followed by a reversal in the other direction. One event does not establish a rule.
- Ignoring timeframe and costs when reviewing the move. Different choices can change the description and result.
- Treating a false breakout as an easy opportunity. Most people who trade lose money.
Learn it in the course
- Support, resistance and breakouts · Mark the prices where the market turned before, and see why a breakout can be real or a trap, and what a level can and cannot tell you.