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Advanced technique #11 (True and False Trend Line Breakouts)

When price breaks through a trend line, how can we tell whether it is a true or a false break?
Well, we can't tell or predict until we see it later on. But, we can analyze what price has been doing prior to this breakout in order to form our own opinion and bias, and either pay attention to the breakout or disregard it.

We can always go back and look at waves pattern, or simply, whether price was making Lower Lows (LL), Lower Highs(LH), Higher Highs (HH) etc..?

Let's look at the next two screen shots:

Forex Trend line false breakout

The market was in a downtrend. We drew a trend line connecting first two tops.
(A tutorial on how to draw trend lines can be found at http://www.forextrendline.com/)
Price was obeying the line, but then at some point (where I put a yellow question mark), price breaks the trend line and closes above it.
How can we know at that moment whether we could trust this breakout or not?

The simplest and popular method is to wait till price returns back to test the strength of the broken trend line again. Then, if it holds, traders would say that a breakout is confirmed and enter either somewhere near the test point or when price advances through the earlier established breakout mark.
Here is a quick example (I drew the red candles myself to illustrate the point):
Forex Trend line test
After the break of a trend line price returns, tests the line again, finds support and, as a result, goes up. Yellow dotted line indicates the point of entry with a Buy order.

BUT, this kind of re-tests don't happen all the time. Sometimes price would just break the line and advance further without looking back. What to do then?

This is why I like to look back at older data to learn what happened prior to the breakout.

What can we see on the first example (first screen shot above)?
Price was consistently making Lower Lows. But, most importantly, prior to breaking a trend line, price made another Lower Low, telling us that Sellers were still strong and were able to push the price down.
Based on this, we can say that this particular breakout that we were questioning cannot be "trusted". (I use the word "trusted", because whether the breakout was valid or not we will only learn later).

Now, let's look at the next example below:

Forex Trend line false and true breakout

Let's start form the beginning: price is making Higher Highs and we draw our red trend line.
At some point later the red trend line gets broken. Can we trust it? The answer is "no, we can't", because we still can see a higher high, which means that buyers were still able to push the price higher.

Few candles later price is bottoming out, attempts another up-move, but fails and puts a Lower High this time.
That's nothing else but a trigger that bulls are weakening and either one of the trend lines (solid or dashed in brown) which you'll be able to identify will become the point of truth: if it gets broken - the price is very likely to move lower.

That's it. A simple method, which might help you to judge about most likely outcomes of the trend line breakouts.
Remember, that in the uptrend you need to take into consideration only Swing Highs, in the down trend and for downtrend trend lines - only Swing Lows.

I hope you enjoyed this trend line breakout presentation.
Happy trading!

Edward Revy
and my best Forex Strategies Team
http://forex-strategies-revealed.com/

Copyright © Forex Strategies Revealed

hi, i am jatin. i not got meaning of your line 'The simplest and popular method is to wait till price returns back to test the strength of the broken trend line again' i mean we cant wait and if we wait so we might loss of large part of profit obtain through this strategy. And what sl and tp would you suggested for this strategy.

Thank you, Jatin

I'll make a new illustration to it by Wednesday.

Hi Edward,

My name is Lino, Iv been following three of your systems, the trendline break out system, trend line trading strategy and reading up on true and false T/L breakouts.

I was doing very well untill greed got the better of me and i over leveraged which quickly stole a big slice of my capital, my big head doing!

What i would like to suggest is, may i post my skype name on here, in that way when we trade we can learn from each other while live trading, sometimes if a trade setup is not really there we tend to want to trade anyway, with others reading this awesome site we can help each other by making sure we sticking to the rules on here.

Just a thought, worked well for me once before, i met guys from a forex chat room, i refered them to here, they read the strategy and we hooked up on skype, we stuck to the rules and make some awesome trades.

Im going to write my skype name here, if you decide to post this comment anybody is welcome to add me, lets help each other when it really counts!

Regards Lino.

Sorry Edward, my skype name is Lino De Sousa, Im from South Africa.

Thanks Edward for the this wonderful strategies. By the way, are we allow to print these strategies out for our own reference and study? Need to ask you for permission first. Thanks.

Thank you, Lino
I'm sure Skype chatting is a great idea, but , unfortunately, I won't be able to join in because of my tight schedule..
But I always be here to answer every question you may have.

Kind regards,
Edward

Sure, the strategies can be printed out for your own reference or shared with friends.
They cannot be, however, re-published anywhere without special permission.

Regards,
Edward

Great stuff!
thank you, Ed!

Lew