Types of False Breaks
The Most Obvious – Bear and Bull Trap
A bull or bear trap is 3 to 4 candlestick bars showing a break at the key market level. This break is formed when the market after committing to a particular trend shows a small reversal in the form of some bars. Thinking it as a reliable indicator of reversal, many amateur traders get trapped by opening the position.
A bull trap is formed when the markets cross the key support level making the amateur traders believe that it is the right opportunity to open a position as the trend is reversing. They short a position thinking that the market is now in momentum. And yes, the market moves a bit above it, but at the same time, the intelligent traders play their game of selling at this high price, making the markets crash and stripping beginners off their money.
False Break in the Trading Ranges
Amature traders in the forex world get trapped in the spiral of false breaks after learning the key market levels of support and resistance. Well, it is very easy to determine that there is a break in the trend, but is not easy to finalise if it is a change in the trend or not as there are chances that the market could reverse back in the area of the range. So instead of hurrying to open a position, the best way is to wait for the market to close outside of a trading range. A movement like this is a confirmation that the trend is finally broken.
- False Break of an Inside Bar (Fakey Setup)
There are many instances when you may find a false break of inside bar and a mother bar. It is crucial to understand the way to trade with a fakey setup as, if learned correctly, it can make huge profits.