The ‘False Break’ Trading Strategy

false break trading strategyWhen was the last time you entered a trade and it immediately moved against you even though you felt confident the market was going to move in your favor? When was the last time you traded a breakout and got stopped out? I’m willing to bet you’ve experienced one or both of these things recently in your own trading, and I’m also willing to bet that me or one of my students probably took the opposite side of one of these trades that seemed to ‘fake you out’ of your position…

You see, false-breaks happen all the time in the markets; they are a result of the ‘herd mentality’ that causes people to buy the top of a move or sell the bottom. As price action traders, we are in a unique position to take advantage of false-breaks and of the weak ‘herd mentality’ that so many amateur traders possess.

I have made most of my money as a trader by using contrarian trading approaches like false-breaks and my proprietary fakey trading strategy. It is the power of contrarian trading and using false-break patterns and fakey setups that allows myself and other savvy price action traders to profit from other traders’ misfortunes. This may sound a little harsh, but it’s the reality of trading that the majority of traders lose money, informed and skilled traders make money, and the ‘pigs get slaughtered’, as the saying goes. I hope there are light bulbs going off in your head now, because this article is all about contrarian thinking, false-breaks, and how to take advantage of the ‘herd mentality’ that causes so many traders to enter right when the market is about to change direction…

So what exactly is a false-break?

I thought you’d never ask! Joking, I know you are probably thinking that right now, so here you go…

A false-break can be defined as a ‘deception’ by the market; a test of a level that results in a break of that level but the market then retracts and does not sustain itself above or below that level. In other words, the market does not close outside of the level being tested; rather it leaves behind a false-break of it. These false-breaks are huge pieces of evidence for impending market direction, and we need to learn to use them to our advantage instead of becoming their victim.

Here is a visual example of a false-break of a key market level:

Essentially, a false-break can be thought of as a contrarian move that ‘sucks’ the over-committed side of the market out. The concept is to wait for the price movement to clearly show that a market has committed to one side of a trade and that they would be ‘forced’ to liquidate their position(s) on a strong reversal in the other direction. Typically, we see these scenarios unfold as a trending market becomes extended and all the amateurs jump in right before the counter-trend retrace, or at key support and resistance levels or at consolidation breakout scenarios.

The herd mentality causes traders to enter the market typically only when it ‘feels’ safe. However, this is the deception; trading off feeling and emotion is exactly why most traders lose money in the markets. Many traders become deceived because the market looks very strong or very weak, so they think it’s a no-brainer to just jump in with that momentum. However, the truth of the matter is that markets ebb and flow and they never move in a straight line for very long. This is known as “reversion to the mean” and it’s something I expand on significantly in my advanced Forex trading course.

We really have to use logic and counter-intuitive or ‘contrarian’ thinking to profit off of the weak-minded herd mentality that dominates most traders’ minds. This is why it’s very important to remain disciplined in the area of trading false-breaks, rejections and failures, and why I love trading them so much.

Types of False Breaks

1. Classic Bull and Bear traps at key market levels

A bull or bar trap is typically a 1 to 4 bar pattern that is defined by a false-break of a key market level. These false-breaks occur after large directional moves and as a market approaches a key level. Most traders tend to think a level will break just because a market has approached it aggressively, they then buy or sell the breakout and then many times the market will ‘fake them out’ and form a bull or bear trap.

A bull trap forms after a move higher, the amateurs who were on the sidelines watching a recent strong move unfold cannot take the temptation anymore, and they jump in just above or at a key resistance level since they feel confident the market now has the momentum to break above it. The market then breaks slightly above the level and fills all breakout orders, and then falls lower as the big boys come in and push the market lower, leaving the amateurs ‘trapped’ in a losing long position.

2. False-break of consolidation

False breaks of consolidation or trading ranges are very common. It’s easy to fall into the trap of thinking a trading range is going to breakout, only to see it reverse back into the body of the range. The best way to avoid this trap is to simply wait until there is a clear close outside of the trading range on the daily chart, and then you can begin to look for price action trading signals in the direction of the breakout.

3. Fakey’s (inside bar false-breaks)

The Fakey setup is one of my all-time favorite price action setups and learning to trade it will do a lot for helping you to understand market dynamics. Essentially, the Fakey is a price action pattern that requires there to be a false-break of an inside bar setup. So, once you have an inside bar setup, you can watch for a false-break of the inside bar and the mother bar. Now, I am not going to get into all the different versions of the fakey trading strategy today or the different ways to trade it, but you can learn everything about my proprietary forex fakey trading strategy in my professional Forex trading course.

Here’s an image of two Fakey setups, note that one has a pin bar as the false-break and other does not, these are just two of the variations of the Fakey setup:

False-breaks can create long-term trend changes

As price action traders, we can use the price action of a market to anticipate false-breaks and look for them at key levels as they will often set off significant changes in price direction or even a change in trend from these key levels.

We need to pay attention to the ‘tails’ of candles that occur at or near key levels in the market. Ask yourself how prices reacted during each daily session…where did they close? The close is the most important level of the day, and often if a market fails to close beyond a key market level, it can signal a significant false-break. Often, prices will probe a level or attempt to break out, but by the close of the daily bar price has rejected that level and ‘tailed out’, showing a false-break or false-test of the level. A failure of the market to close beyond a key market level can lead to a large retracement or a change of trend. Thus, the close of a price bar is the most important level to watch, and the daily chart close is what I consider to be the most important.

Here’s an example of a false-break in the EURUSD daily chart that led to a top in the market and started a long-term downtrend:

History Teaches Us A Lesson

It’s worth noting that on the week famous trader George Soros shorted the British pound and ‘broke’ the Bank of England ( September 16, 1992) -  the chart had shown a massive false-break signal. The chart below shows the price breaking upwards to new highs and then crashing back down. To those who follow me regularly you will note that this was actually a classic fakey setup, and is clear evidence that this price action strategy has worked for decades.

Final word on false-breaks…

As traders, if we don’t learn to anticipate and identify deceptions or ‘false-breaks’ in the market, we will lose money to traders who do. If we pay attention to the price action at key levels on the daily chart time frame, the ‘writing’ is usually on the wall in regards to false-breaks.

If I had to leave you with one crucial piece of advice for your Forex trading career, it would be to drop everything right now and start studying false-breaks and contrarian trading approaches. By doing so, you will be ahead of 95% of traders who are stuck in a cycle of trading off mainstream misconceptions and ineffective trading methods. As a contrarian, I want to be trading when most other retail traders are committed to the wrong side of the market, and this is difficult to do if you don’t understand false-breaks and fakey patterns. Trading false-breaks and my proprietary ‘fakey setup’ is a core focus in my Forex price action trading course, and I expand on these topics in great detail in it. I teach my students a plethora of different price patterns to look out for when trading false-breaks and fakey setups. This ‘contrarian’ style of trading is something I strongly believe in, and it has proven itself time and time again. If you were to learn only one single trading strategy to apply in your Forex trading, false-breaks would be on top of the list.

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About Nial Fuller

is a Professional Trader who is widely considered ‘The Authority’ on Price Action Trading.
He has a monthly readership of 250,000+ traders and has taught 15,000+ students since 2008.
If you want to learn more about harnessing the power and simplicity of Nial’s Price Action Trading Strategies checkout his Professional Forex Trading Course.   -   You can Contact Nial here.

Join the Discussion. Click Here to Leave a Comment – 73 Comments.

  1. Giwa saibu olajide

    Nice one , this is lovely, I love your trading method, thanks

    Reply
  2. Soni

    really good article!! from now, I’ve got a new education about trading strategy. It will be make me better on trading. thanks nial…

    Reply
  3. CHAI

    Hi, in Fakey, we might entry at breakout in Inside bar but it formed fakey at the end..

    How to avoid this happen?

    Reply
  4. Shota

    hi,
    I always love to read your article and you have very amazing insight. I have been trading for 2 years in Japan. I could improve my trade recently because of your lectures.
    Thx!!

    Reply
  5. Goddy Emmanuel

    nice article

    Reply
  6. rajendra

    WOW.EXCELLENT ,VERY USEFULL

    Reply
  7. Nabs

    Great article

    Reply
  8. Segun

    Well explained Nial. This makes so much sense. This is the truth. Forex grail…

    Reply
  9. Jeremy

    I agree with Tom above who said it would be really helpful if you showed possible trade entry points with this and your other strategy examples

    Reply
  10. sithobekile kesa

    wow one of your greatest articles each one serves a different purpose in trading and is neccessary as a lesson.
    Thanks Nail

    Reply
  11. arman

    Hi

    This article like other articles has covered basic market movements and concepts.
    Thanks Nail .

    Reply
  12. Rahwa

    wonderful article. May God bless you and your family.
    you are sowimg now and you will harvest.

    Reply
  13. Rick

    Dear Nial, Great articles. Awesome insight, unparalled patience, much dedication. I got your course, great material, indeed. Worth every penny spent.
    Rick

    Reply
  14. joe

    I’m starting to get the false break concept at key resistance/support levels. Thanks Nial

    Reply
  15. carlos pedraza

    Thanks Nail.
    Every note helps a lot in my way to be a excellent pro trader

    Reply
  16. Wajdi Beiruthy

    note worthy

    Reply
  17. Manjula

    False break is the most interesting and the best phenomena I learnt from Nial for trading. Thank you a lot

    Reply
  18. KC

    i wish i have know you much earlier to save all my agony & years frustration in trading….great article Nial!

    Reply
  19. forex smile

    HI thanks for article!

    Reply
  20. Berke

    What is worth more than the money making from trading for NIal must be the praise of his followers. He is one person who deserves it. Almost a fool proof strategy for whom is disciplined.

    A five star lesson, again. I call him “The Master” of swing trading.

    Reply
  21. Marko Graenitz

    Absolutely agreed! Risk/reward using false breaks is exceptional. Hard thing is to learn to be able to pull the trigger against the crowd.

    Reply
  22. Samuelkken

    In deed, this is wonderful lesson, I must stick to ur lessons.
    God bless u for ur generosity

    Reply
  23. Kamran Saeed

    Thanx Niall.I am not new but did not understand the Charts.i just implement this strategy on EURUSD charts, things are Cleared to me.Thanks for helping me and peoples like me.

    Reply
  24. Alan

    On many of these False breaks they show exhaustion candles or what we call pin pars signaling the end of both and up trend and a down trend. The longer the wick the wick OR tail the better either way. The importance of drawing support and resistance lines is so important.

    Reply
  25. eric granatha

    again, it’s a great lesson for me to add my trading knowledge. thanks a lot nial…

    Reply
  26. Angelo

    The he who gives he shall receive..
    I don’t see how people would spend hundreds of dollars on gossip newspapers like National Inquirer and so on , and not spend few hundreds on getting Niall’s valuable and today’s very needed input on how to trade the markets. Niall’s imput is the core of not only getting wealth, but also the core of how to protect the wealth of those who already have it.
    Keep up the generous work Niall !!!

    Reply
  27. George

    Gold dust…as usual, Thanks Niall.

    Reply
  28. Raj Jadeja

    Awesome…………

    Simply superb

    Raj

    Reply
  29. Raj Jadeja

    Thank you Nial.

    You are my mentor!!!!

    Raj

    Reply
  30. KRISTOFA OKENTA

    IT is always a great lesson from the Professor.

    Reply
  31. Lionell Dixon

    I absolutely love your lessons Nial! Keep up the great work!

    Reply
  32. slivester

    I love to read your articals

    Reply
  33. kotijett

    Thanks Nial. Inspirational as always!

    Reply
  34. GaryC

    Great stuff Nial, look forward to reading that part of your course.
    cheers
    GaryC

    Reply
  35. Herve

    Very interessant, your article!

    Reply
  36. SWISS CHF

    famous trader George Soros shorted the British pound and ‘broke’ the Bank of England

    How? that is not possible! can it.

    unless he sold $10000 billion

    please explain how he broke bank of england

    Reply
    • nial

      SwissCHF, to answer your question – Soros is known as “The Man Who Broke the Bank of England” because of his US$1 billion in investment profits during the 1992 Black Wednesday UK currency crisis

      Reply
  37. Mike

    Hi Traders
    What a laid back article yet simple but profound.
    My advice to all aspiring traders coming to this website is to stick to Nial’s trading strategy like a fanatic sectarian believer would to his religion. If you think that you can blend up your own ideas with PA strategies then perish the thought of success in FX market. Bottom line, follow PA strategy thoroughly and fully without blending it with your ideas of what may work and watch your success skyrocket.
    MH

    Reply
  38. Sanjay Prajapat

    Great Article Sir,

    One of the truth of Trading is Trading false breakout, You are a Great trader & guide. Thanks a lot for providing such a good information with examples.
    Keep it up sir.

    Thanks

    Reply
  39. Maxim

    Excellent, excellent, excellent ….. Thanks !!!!!

    Reply
  40. balasubramanian kuppusamy

    NIAL sir thankyou for your service. May GOD bless you.
    Only some people in the world have good intentions on others welfare. Thankyou again.

    Reply
  41. jido

    In a matter of time, u will help ♍ƺ boost my bank account.

    Reply
  42. Tim A

    Very good article and relevant to what I am doing on intraday charts. thx.

    Reply
  43. Tomson

    Thanks Nial,
    Great as always.
    Cheers Tomson

    Reply
  44. Iain

    Great bit of education Nial.

    Reply
  45. Sher

    A word to the wise is sufficient…..thank you Nial.

    Reply
  46. jay Nigeria

    A friend posted this and gave me the link. I call him friend and he sure got it from a friend. Are you a friend of my friend? i guess so cos business wise he always talks and trade your principles.Thanks to Nail, friend

    Reply
  47. Emmanuel

    You are the best Nial…

    Reply
  48. Blixa

    Anotehr excellent article. One of the things that I’ve learned from Nial is the strong emphasis on price levels, something tha I wasn’t paying much attention to when I was first starting out. When you start approaching the market from that angle the picture suddenly becomes a lot clearer.

    Reply
  49. Hadi

    Thanks Dear Nial
    Very Useful point which i am sure many traders got trapped in that many times.

    Reply
  50. Hadi

    Thanks Dear Nial
    Very Useful point witch i am sure many traders got trapped in that many times.

    Reply
  51. Sez Elabor

    All hail the god of Forex Trading..I am addicted to your lessons Nial.. you changed my trading style and i am still shocked the way my trading has gone easy for me. Fakey setup is one of my best and i learnt it from you..Respect to the Alcapone of Forex trading..

    Reply
  52. sudhir

    If I am to choose one setup for forex trading then it would be fakey. Fakey works best when it is traded in the direction of the daily trend.

    Reply
  53. Ramli M.S

    Thanks valuable tips

    Cheers

    Reply
  54. Saba A.E

    Master,
    This is indeed, is from a Master and this article is worth sleeping and waking up and sleeping with again so that it becomes ones second nature.

    I doff my hat!

    Reply
  55. kareem ojekhebholo

    grt lesson.thanks!

    Reply
  56. Eddy Adeosun

    Fantastic article. Know the feeling all too often of opening a trade and then it goes against me. Makes a lot of sense. Time to put your theory into practice.

    Reply
  57. Fabiano Venturini

    great lesson Nial
    Thank you. You are the strongest

    Reply
  58. Daniel

    Well put Nial! Now if I can only learn ALL the possible configurations of a false break :)

    Reply
  59. Ironn

    Great article my friend!

    Reply
  60. AMIN MALIK

    SIMPLY FANTASTIC, THE ARTICLE IS SUPERB.THANK YOU, NIAL

    Reply
  61. Mule5010

    Wow I just had a revelation !!
    I’m only a new trader
    I was looking at the charts today and these types of setups seemed to jump out at me. and then you posted this article and linked the dots and a light bulb just went on in my head!
    Thanks Nial, this has really built my confidence in my trading strategy!

    Reply
  62. Tim

    Thank you Nial for this artical.
    Just when I was beginning to lose my PATIENCE, along comes another reminder from you about jumping the gun.
    Thank you for keeping me informed and on my toes.

    Reply
  63. Brannigan

    Nial, your articles are a must read for all traders. great article!

    Reply
  64. mike

    HI NIAL

    IS CERTAINLY ONE OF THE BEST TECHNIQUES, WHICH HAS RESULTED IN CHANGING MY TRADING IDEAS….NIAL YOU ARE THE BEST….

    Reply
  65. Terhile

    This is good for the season we are in

    Reply
  66. taiwo

    very very educative article from one the greatest price action traders of our time

    Reply
  67. RomNed

    Excellent article!

    Reply
  68. Zarshad Khan

    Nial,

    I love to read your articals, its amazing and full of knowledge, the way you explain it outstanding , waiting for opening account and enter in member area.

    Reply
  69. Tom

    Great article, but it’s 100 times harder to trade these setups live when we don’t see following bars. It’s a pity that you haven’t described these charts with possible entries (how would you enter) for ilustration how to trade these setups. Keep up good work Nial.

    Reply
    • nial

      Tom, I do expand on the actual entry techniques in my course and members lessons, cheers.

      Reply
  70. Ross

    Another great article, likely best one yet. Fantastic. You’re the Einstein of trading. Everyone should be reading and writing you comments. Awesome article buddy. Thanks. Your articles always add knowledge to the already huge knowledge base. This’ll be great for beginners and experienced alike. Hope I can make one of your seminars.

    Reply
  71. Yam

    Nice Article!

    Reply

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