We capitalize on fake-out breakouts with a very simple day trading strategy that uses basic technical indicators and a general understanding that the market gives us big CLUES before it attempts to break out of a current trading range.
The term ‘fake-out breakout’ simply means that we are expecting to see price break new highs or lows and keep going, however, when it breaks out, it quickly reverses and stops you out of the trade for a small loss, rather than completing its mission and making you money along the way.
Our fake-out breakout trading strategy uses some simple tools and techniques to spot one coming our way, and then we can capitalize on it once we know when it’s coming. The 3 keys to a successful breakout in price action are size, speed, and momentum. First, I want to see the BIG MONEY telling me this price is going to break out, then I’m looking for high speed to confirm this at the point of breaking out, and last I want to check momentum to make sure it is also confirming the move has room to go further.
The signs of a fake-out breakout are very simple, and we use these tools in other ways in our trading as well. The first thing we need is SIZE. I need to see the BIG MONEY failing just before the market breaks the highs or the lows. Second, I need to see the SPEED of the price action start to slow down just before the market breaks out, and third, if momentum is overbought I will be suspicious of a breakout to the long side, and vice versa to the short side. The concept is very simple. I’m looking for fewer BIG MONEY traders, less speed, and momentum to confirm in the wrong location (overbought or oversold) in order to see a fake-out breakout.
And finally, remember that your fake-out breakout trading strategy will tell you when a move is going to FAIL, so remember to use your failure trading patterns when you see a fake-out breakout. A fake-out breakout doesn’t mean you don’t take a trade, it just means you aren’t going to get the big, strong breakout, so look for the reversal pattern and make money of this fake-out breakout day trading strategy.