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False breakout trading strategy using Market Profile

On the left side of the chart, you can see a trading range that formed while there was a relative balance of supply and demand in the market. A bulge formed on the profile, the Value Area High and Value Area Low levels show the limits of the value area (to read about the basics of the market profile indicator, read these articles: one, two, three, four).

As long as there is a balance between supply and demand in the market, it is recommended to sell around the upper limit of the balance (for example, from the VAH level) and buy around the lower limit (for example, from the VAL level ). The intention is clear – buy low, sell high. The strategy will lead to profit until the balance is upset.

In our case, the balance was upset when a bullish breakout occurred on the 29th (1). Under the influence of some bullish factors, buyers got an advantage in the market, and the price went up on increasing volumes. It seemed that the picture was bullish.

However, the next day, almost all growth progress was wiped out and a day later the price dropped inside the initial range. A false bullish breakout was formed.

The following conclusions can be made:

  • there were not enough buyers in the market to support the bullish momentum;
  • perhaps the impact of the news was overestimated, and purchases were made in the heat of the moment. Traders probably thought “faster, until it flew even higher”;
  • the large volume on the 29th (1) represents buyers who tried “not to miss the boat”. This volume also shows short positions closed by stop-losses that were set above the range limits;
  • a professional trader, who knows and sees more than anyone else, could use this spike of trading activity on a bullish breakout attempt to accumulate a short position. It is believed that a professional trader sells on a breakout and buys short positions from those who are forced to close them.

If the volume on the 29th is real bullish activity of major traders, why did the price drop? This means that a major trader is likely to have a bearish view of the market.

So, when the price dropped to the original range after an attempt of a bullish breakout on high volume, one might get an idea to open a short position from the VAH level – approximately from the 14520 level.

The idea has greater profit potential because a failed bullish breakout can be followed by a real bearish one. Even a bearish trend can be set in.

Let’s look at a few examples to elaborate the strategy.

Example 1

This is a daily bitcoin chart.

My profession is a journalist, but my hobby for 8 years has been studying Forex investing and trading. During this time, I managed to gain extensive experience in investing and trading cryptocurrencies and double my capital in the Forex market. To be the author of this magazine, the site owners invited me to participate in one of the 2020 trading webinars, and I will try to reveal the most relevant crypto market news for you.

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