What does it mean to fade the breakout? This is the type of trade that one can make when they trade in the opposite direction of the breakout — or trading the FALSE breakout.
You would always want to be on the opposite side of a false breakout because a false breakout is one that is not going to manifest into the kind of trade that you truly need.
A false breakout means that the market may continue to trade in the same direction as it was before the false breakout took place. Traders can fade a breakout if they think that a breakout from a support or resistance level is false and won’t keep moving in the same direction.
You should only attempt these as a short-term strategy, and it is only meant to help you get out of the way of a false breakout and still make profits while doing so. It is not ideal to try to find every false breakout that you possibly can and attempt to trade it. You are not all that likely to be profitable doing so, and you may end up getting whipsawed in the process.
Most Breakouts Fail
Most breakout moves ultimately fail because there is a small minority of traders who ultimately make money off of the majority of traders. If everyone is trying to buy a pair at a resistance level of sell at a support level, the market maker will need to be on the other side of the trade. The market maker knows what they need to do to make money, and they will position themselves accordingly.
Retail traders like to trade breakouts, but the institutional and big money accounts will often fade a breakout. The smartest traders know this and they know that they can potentially profit by working against the wisdom of the crowd and trading more akin to what the institutional players are doing.
After all, it is the institutional players who are frequently the ones that make the most money in the market. It just makes sense that most people would like to emulate them and trade similar to what those people are trading like.
The best way to profit like the big dogs in the market is to act like the big dogs in the market. Otherwise, you may be positioning yourself in a place where you simply trade like the retail money and don’t make any profits for yourself as a result. It can be a scary world out there for retail traders, so try not to trade with the same mindset that they trade. Think differently.