If you believe that the price’s breakthrough to a certain support or resistance level is a false breakthrough, and it is difficult to fluctuate in the previous direction, you can conduct a reverse breakthrough transaction. Performing a reverse breakout transaction may prove to be more savvy than a breakout transaction.
Remember, reverse breakout trading is a very effective short-term trading strategy. Testing the support or resistance level at the beginning of the price may end in failure, but it may still succeed in the end.
To repeat it again: a very effective short-term trading strategy in reverse breakthrough trading. It is not suitable for long-term traders. By learning about false breakout trading, you can avoid becoming at a loss.
Reverse breakthrough trading is quite attractive to many independent traders, why?
Support and resistance levels are like floor and ceiling, respectively. If these price levels are breached, we would expect that prices may continue to fluctuate in the direction of the breakthrough.
If a certain support level is broken, it means that the overall price will run in a downward direction, and people are more likely to sell than buy.
Conversely, if the resistance level is broken, then most people will think that the price is more likely to go higher, and people will be more inclined to buy than sell.
Independent foreign exchange retail investors have a greedy mentality. They believe that trading in the direction of the breakthrough will yield huge returns. They believe that huge fluctuations are accompanied by huge gains. They always want to catch the big fish in the pond and forget the little fish near the big fish.
In a perfect world, this idea will be correct. However, our world is not perfect. The prince and princess did not always live a happy life in the end. In fact, most breakthroughs ended in failure.
The simple reason for the breakthrough failure is that a small number of traders must win money from most traders. Keep in mind that a small number of smart traders are big players in the market, they have huge accounts, and the buy or sell orders are astronomical.
What we want to sell is based on the premise that there must be a buyer. However, if everyone intends to buy above the resistance level or sell below the support level, the market will be biased towards the other side of the balance. Let us warn you: the market is not so dumb!
Forex retail investors like to break through the market.
A savvy small group of traders, such as institutional investors and more sophisticated traders, like to conduct reverse breakthrough trading.
The savvy trader will make use of the ideas of most retail investors or inexperienced traders to make a fuss and be in the upper hand in the game with them. This is why, trading next to savvy traders may also result in very substantial gains.
You should keep in mind that a few savvy traders make reverse breakout trades, while the vast majority of traders suffer heavy losses in false breakouts.