Updated: Jul 5
Every trader (be it intraday, swing, positional, or scalper) should know how to differentiate a genuine breakout and a false breakout.
Do you know why?
Because any ‘Entry’ and ‘Exit’ in any trade should come through a breakout or false breakout opportunity!
That doesn’t mean other trading techniques will not work. My explanation holds good if a trader is looking for the best entry point and best exit point in any trading technique.
Let me explain in detail.
It’s important to understand two herds that exist in the market:
1. Smart Money and
2. Dumb Money
‘Smart Money’ refers to institutional investors, big sharks who have money and information power who give direction and momentum to markets.
‘Dumb Money’ refers to nonprofessional traders, retail traders who often try to make quick money.
Do you agree that it’s always a good idea to follow smart money?
Then you should know one thing.
Participation from smart money creates a genuine breakout, and the absence of smart money participation results in a false breakout. Isn’t it?
What is a Breakout (Price-Volume Breakout)?
Investopedia website says, “A breakout is a stock price moving outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support.”
In image 1, the price broke the resistance trend line with high volumes. At the time of breakout, the volatility of the stock will be high.
Similarly, if the price breaks the support trend line, few recognize it as a breakdown.
To keep it simple, we will focus only on the breakout.
But you can find a simple explanation about 'Breakdown' below.