Fakeout is a situation that refers to a trader when entering a position, with the expectation of a price movement that ultimately does not occur. To learn more about this fakeout, you can read the following forex article. If you want to get updates about other trading, you can follow GIC's Instagram for more information!

What is Fakeout?

Fakeout is a situation that refers to a trader entering a position, expecting a price movement that ultimately does not occur. You often come across this term in trading and technical analysis (TA). In most cases, individuals use it for a scenario where the price moves in the opposite direction of the trade idea. Additionally, a fakeout can also mean a “false breakout” or “fake breakout”. The price goes up and breaks out of the technical price structure and then reverses quickly. This is the worst-case scenario for any breakout trader who enters a trade immediately when the price is falling. Fakeouts can result in significant losses on your part. A technical analyst may determine a pattern that fits their tactics perfectly, which seems to be working as expected. Still, the price can reverse quickly due to external factors resulting in a massive trading loss. Some traders will choose to plan their exit strategy and use stop-loss orders beforehand due to such situations. This is a fairly common strategy used for fundamental risk management.

What is Fakeout in Crypto?

In volatile markets, breakout trading can be a profitable tactic by taking advantage of big moves following certain trading patterns. However, it is often plagued by fraudulent signals and false breakouts. With the occurrence of this phenomenon, even the best traders become discouraged. Continue reading as we want to discuss in this article: the meaning of false breakouts, how to detect them, and reduce the risks they pose.

The Difference Between Breakout and Fakeout in Trading

As the name suggests, a false breakout or fakeout is when you don’t get any continuation after a breakout. Often much worse than that, the asset you are trading will reverse direction completely and move decisively against you. Combined with poor money and risk management practices, a fakeout can be absolutely devastating to your soul and account balance. As the name suggests, a breakout involves a situation where price ‘breaks out’ of a pre-defined range. A breakout occurs when a stock price rises above its current resistance level, or falls below its existing support level, and this move is accompanied by high trading volume. If the move beyond the support or resistance level occurs with low trading volume, it may not indicate a true breakout, but rather a fakeout – a breakout of the support or resistance level that does not indicate an upcoming trend, but rather a dramatic short-term price move that subsequently reverts back into the trading range.

Examples of Fakeouts in Crypto Trading

Understanding how to trade false breakouts is easy once you understand two important trading principles:
  1. There should be a clear support/resistance level where traders can look for false breakouts.
  2. Always wait for the closing price of the breakout candlestick to enter a trade.

The breakout candle is the most important factor in identifying the difference between a false breakout and a true breakout. If the breakout candle fails to close above the resistance level or below the support level, then this is the first sign that we are looking at a false breakout developing.

Trade Fakeout Against Dominant Trend

For more consistency and a higher win rate in fakeout trading, trade false breakouts in the opposite direction to the dominant trend.
  • In an uptrend, wait for a pullback to support and wait for a false breakout to occur at this support level.
  • Conversely, if we are in a bearish trend, wait for a retracement to the resistance level, and hold until a fakeout occurs around this level.

 

Important also that you only trade fakeouts at clear and proven support and resistance levels.

Enter After Breakout Candle Closing Price

The best entry strategy is to enter right after the close of the breakout candle. The advantage of this entry technique is that it will give you a tight stop loss while the profit potential can be exponentially greater. You can actually trade false breakouts not only from support and resistance levels, but against other technical levels or price action patterns.

Pay Attention to Trend Lines

Another common technical tool that is prone to false breakouts is trend lines. In the example below, the USD/JPY bearish trend was contained within a downtrend line that was eventually broken. The prevailing trend appeared to be stronger and the trend continued lower. When we closed back below the trend line, it was a good entry signal if you were looking to ride the trend.

USD/JPY bearish trend can be contained within the downtrend line which can be broken at some point When you see a false move against the prevailing trend like the one in the USD/JPY chart above, it is a good signal that the prevailing trend is about to resume. Fakeout trades are more suitable for short to medium term trading although false breakouts can also be found at the beginning of new major trends.

How to Identify Fakeouts in Crypto Trading

In one of the hourly charts for BTC/USD, BTC is clearly trading within a descending channel that is forming lower highs and lower lows. In a chart pattern like this, the upper line is called the main trendline, while the lower line is called the channel line. During a descending channel, breakout traders look for two main signals: the formation of support above the channel line followed by a high-volume breakout to the upside. During this descending channel, you can see the volume profile of BTC/USD consistently dropping as both bulls and bears begin to exhaust themselves. At the end of the channel, BTC managed to find support at $9400 – a level that is clearly above the channel line and shows that bears no longer have the momentum to push price back down to test the channel line. This was an opportunity for bulls to capitalize on the bears’ weakness with a high-volume move to the upside that broke through the main trendline. Incidentally, the chart above also shows a fakeout, which you can think of as a false breakout that is not supported by high trading volume. After touching the channel line a few times, BTC briefly fell through the support zone around February 23. Over the next few hours, the channel line actually became temporary resistance. Without looking at the volume indicators, this move looks like a clear sell or short signal. However, the BTC volume profile during the support breakout is contradictory and does not show high trading volume to support the support breakout. After learning about fakeout is Fakeout is a situation that refers to traders when entering a position, what is the difference between breakout and fakeout, examples, and how to identify it, you can try trading with GIC with registration starting from only 150,000 Rupiah!