Traders generally enter a market moving in the direction they want to trade. But trading on the break-down to new lows or on the break-up to new recent highs is often a major trap, especially for novice traders. Breakouts can lead to losing trades, especially the most ‘obvious’ ones which tend to ‘fool’ all the novice traders. Here are some examples of recent breakouts that totally sucked market traders in ultimately to revert back in the opposite direction. Millions of rupees were made and lost in these moves. The first chart we are looking at is an example of false-breakout of a key support level in the RELIANCE INDUSTRIES. Notice how price broke just below the key level and then quickly reversed, moving significantly higher and sucking out everyone who sold at the lows / as the level broke.
The next chart we are looking at is an example of false-breakout of a key resistance level in the NIFTY. Notice how price broke just above the key level and then quickly reversed, moving significantly lower and sucking out everyone who bought at the high / as the level broke.
This doesn’t mean you should ‘never’ trade breakouts, it just means you should must know logical way of identifying a valid breakout and then how to trade those breakouts.