Breakouts and False Breakouts in Crypto Trading
Breakouts in Crypto Trading
Breakouts are one of the most popular chart signals used by crypto traders everywhere. In this article, we look at some tips and tricks that could help us potentially distinguish between scenarios that can be reasonably expected to unfold as only one of the two outcomes in cryptocurrency trading: Breakout or False Breakout.
If the crypto market regularly tests a level, at some point the price is likely to break through it - we call it a Breakout. When this happens, the price of a cryptocurrency movement can be very significant - particularly if the support or resistance level was strong to begin with. But why does this happen?
The more times the price reaches this level and then drops back, the more significant it's seen to be. Bullish traders might decide only to buy the cryptocurrency once it's broken above this level and doesn't appear to be limited by it anymore. Bearish traders - those that have shorted the cryptocurrency - could also decide to close their positions (also buying the cryptocurrency) because they're worried about taking on too big a loss if the price keeps rising.
Breakout could lead to a far greater number of crypto buyers than sellers at this point, so pushing the price higher. Potentially much higher. This can happen quickly, particularly if there are a lot of orders in the market placed just above the resistance level. After a breakout through resistance, that resistance level often becomes a support area. Likewise, following a breakout through support, the support level often becomes resistant. With breakout trades, the goal is to enter the market right when the price makes a breakout and then continue to ride the trade until volatility dies down. Breakouts are significant because they indicate a change in the supply and demand of the trading pair.
False Breakouts (Fakeout) in Crypto Trading
False Breakout happens when price breaks out but almost immediately return back through its breakout price.
You would see a False breakout if you believe that a breakout from a support or resistance level is false and unable to keep moving in the same direction.
However, as we’ve seen, support and resistance levels are areas not exact numbers. So, in our example below, even if you think the resistance has been broken, other traders might think differently and see that it is a good opportunity to short the asset. Many traders might not feel the market is ready to push higher, so will look to go short at as high a level as possible to maximize their profits. This could potentially cause the market to rise above the resistance level briefly before dropping back down again – called a false breakout or a fakeout.
Failed Breakout (Trap) occurs and the price will breaks out in the opposite direction. This happens when the direction of the trend changed.
How to Measure Breakout Strength
You can measure the strength of a breakout using certain indicators such as Relative Strength Index (RSI). You can find more detailed explanation about RSI in our Technical Analysis Indicator series articles.
Now, let’s looking for a breakout, we’ll expect that breakout to come with a change of momentum. And we can use RSI indicator to find that momentum – RSI measures speed of the move of the price. If that speed is increasing, momentum will be building up too. So, if the price is moving up through our trend line, we want the RSI indicator to be showing higher highs, signaling building momentum.
Here’s an example, where the BTC/USDT price has breaks out of its trading channel to the downside. The RSI indicator clearly shows significant downward momentum on this breakout.
This kind of RSI indicator suggests that market activity might drive this price lower, which is what the price did later. Of course, no indicator is perfect, but using RSI to confirm breakouts will give you a significant edge. We recommend that you add it to your charts, and see what it can do for you.
- If a price pushes through a support or resistance level aggressively – that’s a Breakout
- If the price passes through support or resistance, only to reverse back shortly after – that’s a False Breakout
- These indicators can help your analysis when looking for breakout opportunities.
- These pattens could also help you to spot breakouts:
Chart Patterns , Trend lines, Channels, Triangles