Everybody who trades in the forex market must have come across a situation when they are fully confident that their strategy will work, but ultimately everything goes against them. Not only of the forex market, false breaks is the nature of any market. This is the result of a herd mentality where people tend to buy when the market is on the top thinking that they will make big profits, but the results are exactly opposite.
See, when the market breaks and falls to the new levels, the intelligent investors buy at the bottoms; but the beginners realise the right time to buy (and that so after listening to the people) when the markets have already moved up. At this time they buy, but as the intelligent investors have already made big profits, they sell and the market crashes. Due to this, the beginners have to suffer massive losses.
However, trading using false breaks is an excellent way to make money, but sadly using this way a majority of traders lose money.
What is a False Break?
False break happens when the market breaks the support or resistance level for a short period (one or two days) and then again retraces to the previous trend. The new point that the market makes by breaking the levels is a false break as it does not close outside that level.
Many beginner traders lose money as they think that it is a new resistance or support which convinces them to long or short the market. It is the emotions that make the amateur traders lose money as they enter the markets when they feel that it is safe, but in reality, it is not. It is important to understand that the false breaks should be used to make money, not lose it. Here is an example of the false break:
It is important to understand the proper logic to make money through a false break. You need to know that 90% of the traders in the forex market have a herd mentality and they buy when they feel safe which is usually close to the false break or support and resistance. It is those 10% intelligent traders who take advantage of the herd mentality to make real profits. Do not think that if the percentage of amateur traders is high, then the markets will be in their favour. This is not true.
In the next part of the article, we are going to learn the types of false break.