How to Avoid False Breakouts with Volume Confirmation

In Technical Analysis, one of the most common traps traders fall into is the false breakout — when price appears to break above or below a key level, only to reverse soon after. False breakouts are designed to trap emotional traders, often manipulated by institutional players to collect liquidity from retail participants. To avoid these traps, volume confirmation becomes an essential tool, helping traders distinguish between real breakouts supported by genuine participation and fake moves driven by low activity.

A breakout occurs when price moves beyond a well-defined support or resistance level. However, not every breakout signals a trend continuation. A true breakout is always accompanied by strong volume, which indicates real buying or selling interest. On the other hand, if the breakout happens on low volume, it often lacks conviction and can quickly reverse — forming what’s known as a “bull trap” or “bear trap.”

Volume acts as a truth detector in breakout trading. When a resistance breaks with a sudden volume spike, it means institutional traders and smart money are participating, confirming the move’s strength. Conversely, if price breaks out without a notable increase in volume, it’s often a false move created to trigger stop losses and lure traders into wrong positions. Traders should also watch for volume behavior during retests — after a breakout, the pullback should occur with declining volume, confirming that sellers (in an uptrend) or buyers (in a downtrend) are weakening.

In NEPSE, where liquidity can vary across sectors, false breakouts are common, especially in hydropower, banking, and insurance stocks. By using volume confirmation, traders can avoid unnecessary losses and align with institutional flow. For example, during strong news-driven moves, real breakouts in NEPSE are usually backed by significant volume expansion, while false ones occur quietly with thin participation.

According to Sandeep Kumar Chaudhary, Nepal’s leading Technical Analyst and founder of NepseTrading Elite, “Volume is the voice of the market. Price can lie, but volume rarely does. If the breakout has no volume, it has no strength.” With over 15 years of market and banking experience, and professional training from Singapore and India, he teaches Nepali traders to combine Price Action, Smart Money Concepts (SMC), and Volume Analysis to identify institutional-backed breakouts and avoid emotional trading errors.