False Breaks Can Be Misleading For New Comers in Trading

| January 22, 2013

There is nothing more adventurous and exciting than to trade in the markets. It gives you the thrill that you seek in your life sometimes while earning good profits for you too. This is why there are so many individuals that invest in the stock markets. However, the one thing to note is that investing in the markets without adequate information about the manner in which the markets and specific assets can move can be harmful. It can lead to losses that you may not be able to recover.

This is why it is a good idea to try and understand some of the false breaks that occur in the markets as a pattern. Once you are able to identify these false breaks, you shall be able to stay away from them like the professional investors do. It is common to base your decisions on the obvious trends that are forming in the market. These are the trends that many amateurs tend to pick up and add to movements that may not be otherwise natural. When a large number of individual investors take positions on a trend that seems likely, it fuels the trend aggressively. This can lead to a saturation of the market in many cases, leading to forced liquidation later

Misleading False Breaks That Need to be Avoided

Once you learn how to avoid the false breaks you will be able to trade in a much safer manner. This will allow you to avoid some of the common mistakes that other individuals make because they are not aware of the common false breaks.

The first of the false breaks to avoid is the bull trap or the bar false break. This is a 1 to 4 bar pattern that emerges in the markets. If the asset approaches the key level aggressively, most of the forex traders feel that a breakthrough will take place in the key level. A large number of individuals then start to invest in the asset and following mob mentality others follow. The big boys come in at a time when the markets are almost going to be saturated and when this happens there is an opposite movement due to the over-saturation. Many times the asset falls and people are left with long losing positions that are impossible to manage.

The other false break pertains to trading ranges and this kind of false break occurs when there is a sentiment that the trading range will be broken based on a trend in the market. A good way to avoid this false break is to make sure that you allow the asset to close on a daily chart outside the trading range that has been established over time.

The Inside bar false break is one that occurs when a price action pattern emerges. When something like this takes place, you will need to look out for the inside bar and mother bar in order to avoid falling for a false break.

Category: Forex

About the Author ()

Investing in the stock market today can be extremely confusing, even for professional investors. You can be extremely successful, or you could end up losing money. Keep a constant eye on your portfolio. Be aware of how your stocks are doing, as well as how favorable the stock market conditions are today.

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