1. True breakthrough and fake breakthrough

When a security price rises above a potential resistance level or falls through a potential support level, it usually indicates a significant change in the market supply relationship and foreshadows the start of a new round of trading. In technical analysis, this phenomenon is called a “breakthrough”.

For many technical traders, breakthroughs are exhilarating and worth studying because they often involve significant trading opportunities.

However, the market often releases false breakout signals. So there is a “fake breakthrough” that corresponds to a “real breakthrough”.

A “false break” refers to the price of a security after briefly breaching a resistance or support level and does not move further towards the breakthrough, but returns to the original resistance level or inside the support level, implying a round of potential breakout actions to end in failure.

In the financial markets, a variety of breakthroughs are being played every day. However, fake breakthroughs tend to occur more frequently than real ones. False breakthroughs can seriously fall short of investors' expectations, resulting in losses.

Therefore, investors should learn to better identify fake breakthroughs in order to increase trading profits.

Second, identify potential breakthrough directions

There are many technical analysis methods available to identify potential breakthroughs, such as chart shapes, trend lines, moving averages, etc.

Breakouts are divided into two basic types: continuous breakthroughs and reverse breakthroughs.

Persistent breakouts usually occur after the market has finished, indicating that the market may continue its previous trend.

Reversal breakouts occur when the market trend has worn off, foreshadowing the possibility of a reversal in the movement.

It often takes some time to brew before a deal breaks through. Therefore, investors can judge potential breakthrough directions based on the information provided by the market.

In general, reverse breakthroughs take longer to brew in order to accumulate breakthrough kinetic energy. In contrast, sustained breakthroughs can happen faster.

From the graphical form, the flag, triangle, and rectangle are all continuous forms; while inverse forms include head and shoulders, double top and bottom forms, diamond shapes.

Third, the method of identifying true fake breakthroughs

For many traders, identifying fake breakthroughs can be tricky. In real combat, in order to improve accuracy, we can focus on the following information.

• Transaction Volume

If the trade volume is high or continues to increase, there is a greater chance of a real breakthrough; if the trade volume is low or continues to decrease, a false break is greater.

This is because the trading volume reflects market participation, and the high volume indicates that many traders recognize the current price movement and that the sustainability of the transaction after a breakout is more secure.

Conversely, a low trading volume indicates fewer market participants and greater uncertainty about the subsequent movement of the transaction.

• Penetration rate

In general, the greater the price breaks through the support or resistance level, the higher the probability of a real breakthrough.

Investors can make judgments using percentages. When the price penetration exceeds a certain percentage, it can initially be considered a real breakthrough.

For example, a 3% penetration rate can be used as a criterion for a relatively important support or resistance level. That is, the closing price should be at least above the 3% resistance level or below the 3% support level to qualify as a true breakout. And for some common short line support levels or resistance levels, the standard can be appropriately relaxed, such as 1%.

In addition, investors need to note that when a trend line is broken, it does not mean that there is a trend reversal, many times it just reflects a change in the degree of the trend.

• Volatility

If the price quickly approaches a potential support or resistance level, there is a greater chance of a real breakthrough.

Conversely, a false breakout is more likely if the price moves only slowly towards the support or resistance level.

Volatility measures the speed at which prices change. Volatility increases sharply when prices move significantly over a short period of time, indicating a significant change in the market supply relationship, a potential signal for strong sentiment to start, which also means that a real breakthrough is more likely.

Investors can better understand market volatility by looking at stock price gaps and some volatility indicators.

• Multi-image analysis

Charts for different time periods, reflecting the details of price movements, are often not the same.

For example, if the daily chart shows a potential breakout signal but switches to looking at it on the hourly chart, it might be considered a false breakout.

• Waiting for confirmation signal

If there is not too big a grasp to judge a true fake breakout, investors can consider a temporary view and wait for further confirmation signals to appear.

For example, sometimes the price does not move higher after moving up the resistance level, but hovers near the resistance level. This may indicate that the movement needs to build momentum, wait for time to mature before launching an attack.

Waiting for further confirmation signals can reduce the risk of investors entering the market early. But on the other hand, if the market breaks through at a faster pace, it could also mean that investors will fall behind in the market, with less room for potential gains.

This content discusses technical analysis, and other approaches, including fundamental analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect the expected results.

All investments involve risk, including the potential loss of principal, which cannot guarantee the success of any investment strategy.