Fade the
breakout you say? Was that just a typo? Did you mean to say, "trade the
breakout"?
Nope!
Fading breakouts simply means trading in the
opposite direction of the breakout.
Fading breakouts = trading false breakouts.
You would
fade a breakout if you believe that a breakout from a support or resistance
level is false and unable to keep moving in the same direction. In cases in
which the support or resistance level broken is significant, fading breakouts
may prove to be smarter than trading the breakout.
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 independent traders. Why?
Support
and resistance levels are supposed to be price floors and ceilings. If these
levels are broken, one would expect for price to continue in the same direction
as the breakage.
If a
support level is broken, that means that the general price movement is
downwards and people are more likely to sell than buy.
Conversely,
if a resistance level is broken, then the crowd believes that price is more
likely to rally even higher and will tend to buy rather than sell.
Independent
retail 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 any fool.
Retail
traders like to trade breakouts.
The smart
minority, the institutional, more seasoned traders, prefer to fade breakouts.
The smarter 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 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?
