How to Avoid False Breakout

Rayner: 00:00 The first thing I want to share is that there is no way that you can 100% avoid a false break out. Because that's like saying, "How do I win 100% of the time in trading?" It doesn't exist. So embrace this fact that break outs will fail, no matter how beautiful the pattern is, how high probability the chart may look break outs can and will fail.
Rayner: 00:32 Once you accept this fact, I want to share with you three tips that I personally look for whenever I trade break outs. Number one trade break out with built up. So what is built up? Build up is basically a tight consolidation you see on your chart where the range of the candles get small and tight. That's called a 'build up', and typically like let's say, for example, I want to trade a break out of resistance, I will look for a build up at the highs of resistance. Meaning if the price comes into resistance, I want to see the range of the candle get tighter and tighter. Consolidating for about five to ten candles, before it breaks out.
Rayner: 01:05 Why do I want to see that? Because number one, you have a tighter stop loss which improves your risk to reward, because when there's a build up, you can just simple set your stop loss at a low of the build-up instead of the low of the entire range, which is pretty done wide. That's number one, a tighter stop loss that eventually offers you a better risk to reward. Number two, when you see a build-up, it's a sign of strength because it's telling you that buyers are willing to buy at these higher prices, willing to buy in front of resistance. This is a sign of strength, and these are the two reasons why I love to trade break outs with build up.
Rayner: 01:39 The second tip that I want to share with you is watch how the price action approaches the levels that you're looking to trade the breakout. Let's say for example again you want to trade resistance, you want to trade the break out of it, watch how the price action approach resistance. So what I want to see is higher lows coming into resistance, because this is a sign of strength, it's telling you that the buyers are willing to buy at again these higher prices. On top of it, it looks somewhat like an Ascending triangle, and it typically is from this type of stair-stepping price action to a point where it starts to coil very tightly, and again this is another form of a build up, and really more often than not, the market is likely to break up higher. Again, watch how the price action approach resistance. Ideally, you want to see higher lows coming into it.
Rayner: 02:22 The third thing I want to share with you is to let markets break out. If the market does break out and you are not in a trade, what you can do is to wait for the first pullback to occur, and this can appear in the form of a trend continuation trade, for example, a bullish flight path and a symmetrical triangle. These are possible chart pattern that you can trade, to trade the subsequent move higher.
Rayner: 02:55 These are the three tips I would like to share with you to find higher probability break out trades. That's all I have for you in today's episode. If you have any questions that you want me to answer, leave it in the comments section below so I can look into it and answer in the next episode.
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