Graphic patterns are price patterns that you can recognize with your own eyes. They are an important part of technical analysis and can help you make the right trading decisions.
Fake breakthroughs are prone to appear in two common graphical forms:
☉ Head and shoulders
☉ Double top/double bottom
The identification of head and shoulders patterns is the most difficult for novice traders to identify. However, through the accumulation of experience, this form can become a powerful weapon in your trading toolbox.
The head and shoulders pattern is a reversal pattern. It is formed at the end of the upward trend and may mean that the price trend will reverse and go lower. Conversely, if it forms at the end of the downtrend, it may signal a bullish reversal. The head and shoulders pattern is prone to false breakouts, which also provides a very good opportunity for reverse breakout trading.
False breaks often appear in the head and shoulders pattern, because most traders will notice this pattern, and then set the stop loss very close to the neckline.
When a false breakout occurs, the price usually rebounds. Those traders who choose to go short after the price falls below the neckline or choose to go long after breaking through the neckline are likely to be stopped when the price fluctuates in the reverse direction of their positions. This situation is usually caused by large institutional traders whose purpose is to profit from the majority of retail investors.
In the head and shoulders pattern, you can assume that the first breakout market is a false breakout.
You can perform reverse breakout trades, set limit orders below the neckline and set the stop loss at the highest point of the candlestick above the neckline.
You can also set the profit target below the head and shoulders right shoulder high point, or inverted head and shoulders form right shoulder low points above the level.
The next pattern is double top or double bottom.
Traders like double-top or double-bottom patterns very much, why? It’s simple because they are easy to identify.
When the price falls below the neckline, it signals that the trend may be reversed. In view of this, many traders place their entry orders very close to the neckline, in anticipation of a price reversal.
The problem with this pattern is that too many traders can recognize the pattern and place the entry order in a similar position. This also provides an opportunity for institutional traders to profit from the majority of retail investors.
Similar to the head and shoulders pattern, you can also set an entry order after the price moves in reverse to seize the opportunity for a price rebound. You only need to set the stop loss at or below the lowest point of the false break candle line.
You may be asking, in what kind of market should I conduct reverse breakout trading?
The ideal answer is in a volatility market. However, you cannot ignore market sentiment, major news events, common sense, and other market analysis methods.
Most of the time, financial markets are kept within the range to move back and forth, and usually do not deviate too far from highs and lows.
The trading range is defined by the support and resistance levels. In the game between the buyer and the seller, the price is maintained within the trading range formed by the resistance level and the support level. In this market environment, doing reverse breakthrough transactions can provide traders with very considerable benefits. However, at a certain point, the unilateral market may eventually replace the sawing market, and a new trend may follow.