It is often discussed that in the forex market currencies do not trend as much as other markets, like commodities or bonds, this is mainly to the great liquidity it engages and the level of competitiveness it has. It is actually a fact that currencies in general fairly stable and only shift in small sums and as a consequence the leverage is constantly used in the forex markets.
It is also for this reason that breakouts in the forex markets frequently transform into whipsaws; when a price goes in one direction, but is quickly followed by a movement in the opposite direction.
As a trader, you should learn how to identify real breakouts patterns and avoid the false. This will significantly increase your trading probabilities. Here we will give you some basic strategies you can follow to identify whether a breakout is real or fake.
The volume is always a good indicator to confirm the nature of a breakout since it is one of the few that does not change according to the price and it also functions perfectly in stocks.
There are some traders that think of volume as worthless indicators due to the fact it is rarely shown in non-ECN brokers and in the few cases it is shown, it normally refers to the volume from a specific broker and not the market. However, this is not true; actually, the volume is far from being worthless.
In most cases, when examining brokers, you will notice they display a similar level of volume. When this happens, you only have to look if the breakout price move has a solid volume. If the volume is high, it might be a real one; conversely, if it is low, the breakout could well be fake.
Another indicator would be the source. Ask yourself if the breakout is set on a solid ground. As you know, news, trends and political decisions influence the market in milliseconds. In fact, many traders make their trading activities based on news announcements. Hence, if you notice a breakout befalls news announcements, you can count that as your second indicator.
Every so often, you will just have to trust your instinct. You have been moving in the market for a while and you already know what the signs you should be looking for are. If you think you are in the presence of a real breakout that is probably the case.
On the other hand, if a breakout occurs and you understand how and cannot find any good indicators, then it is probably a whipsaw. Best you can do is to stay away from it and avoid the risk.