Fading breakouts = trading false breakouts.
Keep in mind that fading breakouts is a great short-term strategy. Breakouts tend to fail at the first few attempts but may succeed eventually.
REPEAT: Fading breakouts is a great short-term strategy. It is NOT a great one to use for longer term traders.
By learning trade false breakouts, also known as fakeouts, you can avoid getting whipsawed.
Trading breakouts appeal to many forex traders. Why?
If a support level is broken, that means that the general price movement is downwards and people are more likely to sell than buy.
Independent retail forex traders have greedy mentalities. They believe in trading in the direction of the breakout. They believe in huge gains on huge moves. Catch the big fish, forget the small fries.
In a perfect world, this would be true. But the world is not perfect. Frogs and princesses do not live happily ever after. What does in fact happen is that most breakouts FAIL.
Breakouts fail simply because the smart minority has to make money off the majority. Don’t feel so bad. The smart minority tends to be comprised of the big players with huge accounts and buy/sell orders.
In order to sell something, there must be a buyer. However, if everyone wants to buy above a resistance level or sell below a support level, the market maker has to take the other side of the equation. And let us warn you: the market maker ain’t no fool.
Retail traders like to trade breakouts.
The smart minority, the institutional, more seasoned traders, prefer to fade breakouts.
The smarter forex traders take advantage of the collective thinking of the crowd or inexperienced traders and win at their expense. That is why trading alongside the more experienced forex traders could be very profitable as well.
Which would you rather be part of: the smart minority that fades breakouts or the losing majority that gets caught in false breakouts?