All language subtitles for 5. Identifying False Trend Line Breaks

Since we live in an imperfect world, you and our trendlines are imperfect, as in sometimes you get

false trend line breaks right where it breaks through a trend line and it's supposed to keep going after

the break is supposed to, you know, not go back above the trend line or not, you know, go back into

a trend.

Right.

It has broken the line.

There's a rule around that.

Right.

You know, once the trend line is broken, the the trend is over.

So that's a very important rule to follow.

But a lot of times if something has happened, there's a temporary amount of noise or there's some,

you know, some buying and selling that's caused something to happen.

That's only a temporary false break as opposed to a true break of the trend line.

So we're going to talk about the next couple of lessons are to talk here about how to identify these

false trend line breaks.

At least give us a best chance at this real vexing challenge.

And then also we're going to have a strategy around how can we approach these false breaks and manage

them in a better way when they may occur.

So, first off, you know, let's go back to the rule again, right.

Once a trend line is broken, the trend is over, that that rule will serve you well.

That is a very, very well established rule.

And it really takes emotion out of it, takes hope out of it all.

I hope it comes back above the trend line.

You know, it takes all that, all that.

So there's nothing wrong.

In fact, very good that once a trend is broken, the trend is over.

And to stick with that, however, false breaks to happen.

So, you know, where they're where they're breaking that trend line and the trend isn't over.

It goes back into the trend, you know, very quickly.

So in this case, we're going to keep talking about how densify those and then the next lesson from

trial, the strategy in how to deal with them as well.

And one thing to note about this, the terminology is like a false breakup, but it's actually they're

they're not false.

It really did happen.

The trend line really was crossed.

It really did happen.

But what ends up being false is the conclusion you draw from it.

You know, in a way, you are misled.

It happens all the time.

And we're going to look at how maybe to possibly identify these things where so we're misled unless

there's really three, you know, three good ways to kind of look at this.

And one is in terms of how to identify is did the breakout occur as part of the range or the final close

breaking as well.

And what we mean in the actual close of the, you know, break through the through the through the trend

line.

So, for example, if we look at this image here, we've got a downward trend.

It's established on the second second touch of that downward trend line, that resistance line.

And then we get this long, let's say, in this case, I had just a little bit you see this where we

have this long red candlestick with a long, high range at the top there that breaks through the trend

line.

It broke through the trend line that counts as the trend line breakage because it did break through.

However, the close of the day, you know, which is that the the bottom of the red candlestick in this

example did not did not break the trend line.

It ended up going back into trend back below the trend line.

So that can be an indicator that you might have a false breakout.

And it could also be on the upside, too.

Here you see the next time, the next year where there's a false breakout.

You can see it was actually an up close def I was following the previous day with an up close as well.

But it was up in terms of the close, but the close did not go above the trend line.

The range did the highest highs as far as the price range, but the open in the close and specifically

the close still finish below the trend line.

So it can happen in either case with the other type of candlestick.

And so these are when we indicated it might be a false breakout where it got pushed up high enough to

break the trend line during the day.

The rule would say you would sell them, and that's perfectly fine, the follow.

But if you're worried about a false breakout or you want to push a little bit further, wait for the

close to go above it, and then you can see the last candlestick we have here, not only to the close

go above the trend line, but also the open one, above the trend line and even a whole range of highs

and lows.

The whole candlestick and upper shadow and lower sandlots wicks, all of it finished above the trend

line.

So that would show us this downward trend is definitely over at this point.

And it's not a false Braco.

So when the close breaks through means it's less likely to be a random event or noise related, that

means people are kind of, you know, finishing their positions, closing their positions for the day.

And so the close as the final price of the day is is more a much more accurate way or at least an identifier

that this might be a false breakout if it doesn't break through that trend line.

If it does, then it's very well established that the that there is a breakout and the trend is over.

Another way you can use that use and in combination to or use on its own, it's to look at trading volume,

how much buying and selling is going on.

Right.

So if there's a high volume or a volume spike, you know, that often accompanies the end of a strong

trend, whether it's a strong uptrend or strong downtrend, there's a buying and selling frenzy that's

breaking through that trend line that's causing that to break through the trend line.

And associated with that, looking at the bottom of your chart, where you've got your your your vertical

bars showing, you know, opening, closing or volume.

Trading, how many transactions are happening when you see a spike in that and it's breaking through

a trend line, a trend line that you've drawn, and that's a pretty strong indicator that the that the

trend is over, a steep volume decline shows that overall interest is waning and may signal a breakout

hasn't really happened, but it may signal that interest is waning, may signal a breakout and a steady

volume that then less then it's less likely for a breakout.

But beware is any cross of a trend line is also significant.

So we're looking for a false break on this case.

The trend line has been crossed.

We know that's happened.

We could be taking action just on that.

But if we see a boy, there's a lot of the volumes that really, really spiking or declining or anything.

It's just kind of seems steady.

Then there might be a chance that this is a false breakout.

But high volume, whether it's high or low, you know, may signal that this is a true volume, a true

breakout.

So be wary of that.

And but when the steady, you know, might be like maybe you push a little bit further as far as that

may be, it's a false breakup.

And then lastly, a good tool uses your other indicators, right.

You can use your other indicators to help confirm or possibly disregard a breakout like, OK, they

broke the trend line.

Other indicators are saying the trends are changing.

There's a reversal going on.

OK, I got it.

So if it's an uptrend, I'm selling, because not only is the trend line broken, but my other indicators

are saying that, too, as an example.

So using multiple indicators is always a sound idea.

And we'll learn about it later as we talk about how you can have primary and secondary indicators and

how to use that type of strategy or a third or fourth indicator.

So multiple indicators, you know, can be very helpful.

And sometimes they can give conflicting signals.

They certainly can.

And that's why sometimes you'll want to give more weight that you choose more weight to certain indicators

than others.

And you'd also want to look at your own risk profile.

You know, if you like less risk of a break, a curse, just get out.

Right.

You might want to just get out with the with the well-established rule.

If the trend line is crossed, it's broken through, then you're out.

Or if you're seeing a little bit more confirmation, either there's confliction if you want to take

on less risk than you want to get out right away.

If you want to push it more again and see if this is a false breakout and take a little more risk,

a little bit more downside risk, you can do that.

Again, this is more about you in your training style, in your plan.

And sometimes a confirming indicator can give you an advance warning to be on the watch for a breakout.

Right.

That something might be coming.

We saw that in the examples where we saw a nice upward trend line.

Things were looking great.

And then also I'll pop this bearish engulfing candlestick, which is a real clear indicator that that

a reversal to the bearish, to the downside might be occurring.

And we saw that occur.

You could see you OK.

Our range went below the trend line.

That's a breakage we would sell just on that breakage, just on that, because it broke.

In fact, that's an engulfing candlestick or looks like it's coming.

We might have sold just based on that.

You'd want to have that next day, that last that last read Candlestick to kind of confirm the Persian

Gulf in Candlestick.

But between breaking the trend line and it's getting set up as a golfing, there'd be nothing wrong

with getting out right away.

And before that.

And if you want to wait a little bit more till it fully breaks that trend line, as it did here, and

not only with the clothes also broken, in addition to all the range is broken, that's fine, too,

then it's really, you know, super confirmed.

But you can use your indicators again to help confirm what you're seeing with your tramlines and help

your decision making by combining and using other indicators when when you when they happen.

So that's a little bit about identifying trend lines.

Are identifying false breakouts not easy.

It is the number one challenge out there.

But if you can start using some of these ideas, you can decide and based on your own risk profile and

what you want to do and how you manage your traits to start deciding like, OK, how is this going to

affect my decision making?

Again, if the trend line is is broken, you can always use that rule established rule.

But if you want to try to see if a false breakup is happening, use some of these ideas and see what

happens.

And you might be rewarded in terms of, let's say it's an uptrend and it picks back up.

Or you might have taken a little bit more lost, hoping that the false breakup wasn't really occurring.

And you wanted to prove itself a little bit and it ended up being a real breakout.

And then you need to act accordingly, too, with that extra confirmation.