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Mastering Fakeout Forex & How To Trade a Breakout

Fakeout Forex, False Breakout, Failed Break. Potato, potatoe. It’s all the same thing, but does it need to be a devastating event?

To know how to deal with fakeouts in forex, you first need to know what they are,. You need to know why they happen and how to avoid them when trading. You also need to know how to possibly even take advantage of fakeouts for your benefit.

In this article we explain the difference between fakeouts and breakouts. We answer some FAQs about how to trade a breakout; and show you to take advantage of opportunities in such instances.

If you want to master fakeouts you’ve come to the right place. Read on…

Master Fakeout Forex How to trade breakouts
Master Fakeout Forex How to trade breakouts

What is a Fakeout in Forex?

A forex fakeout is when a trader opens a position in expectation of a price movement, but the movement never materializes and the asset moves in the opposite direction. The event is referred to as a fakeout, or false breakout in technical analysis. 

Simply put, a fakeout is like when as a kid your great uncle comes to visit you for Christmas. Instead of the usual little envelope with a nice bit of cash as a gift, he brings you socks. Or, a bit more accurately, the uncle comes without gifts and steals your socks on the way out.

Why do Forex Fakeouts Happen?

Fakeouts happen when the price crosses or breaks through a particular level (support, resistance, triangle, trend lines, etc.) but fails to continue moving forward quickly after the breakout and then retreats back.

What Is a Support Level

A support level is a line drawn on a chart to show where the price will most likely stop falling. It’s set by connecting the lows that occur when the price is going down. This shows an area where it may be safe to buy. This line shows where prices have rebounded in the past. These are important to watch because they can help you determine whether or not an asset is likely to continue its current trend or reverse course.

For example, if you want to buy more shares of Apple and you’ve noticed it’s been trending down for a while, you can use the support level line to determine when is the best time for you to buy.

What Is a Resistance Level

A resistance level is a horizontal line that shows the highest price a stock has reached in the past. If you see an asset break through its resistance level, it means that investors are buying more of this asset and pushing its price up over time.

What Is a Triangle?

A triangle is a chart pattern that shows a pause in the current trend and is represented by trendlines that are drawn along a converging price range. Triangles are categorized as continuation patterns by technical analysts.

Is there a difference between a Forex Fakeout and a Breakout?

It’s hard to determine whether there is a difference between these two. You would think they are one in the same, however, they are slightly different but also connected. Basically the confusion comes from mixing the terms ‘breakout’ and ‘fake breakout’ which sound like they are the same thing but they’re different.

A breakout is what happens right before a potential fakeout (false breakout). A breakout is basically a potentially advantageous trading opportunity which happens when an investment’s price goes over a resistance level or goes below a support level.

A fakeout, also known as a false breakout, happens after a breakout. Confused? Hear me out. When prices go beyond a support or resistance level, that’s the breakout. If they move back to their previous trading position by the end of the day that’s a fakeout (false breakout). 

In layman’s terms, a fakeout is like  ‘fake hope’. You’re hoping that the asset will continue to rise after it experiences a breakout. Instead it turns right back and goes down…along with your hopes and dreams (just kidding). With the right tools, such as stop loss and take profit orders, you can avoid such a devastating result. 

How To Take Advantage of a Breakout

Breakouts don’t always lead to a fakeout or a drop, at least not right away. A breakout could continue to rise significantly after breaking through its resistance level. In such cases it’s often followed by a period of consolidation. That’s when traders decide whether or not this breakout is real or just another fakeout.

There are two main types of breakouts: continuation breakouts and reversal breakouts.

Continuation breakouts

A continuation breakout is a bullish price pattern that occurs when the price of an asset breaks out above its resistance level, then goes through a consolidation period, before continuing an upward trend. If the asset continues to move up and break through this resistance level again, it is considered a continuation breakout. The first breakout is called the “initial” or “primary” breakout, and the second breakout is called the “secondary” or “secondary top.”

The same goes for down-trending markets. It is also considered a continuation breakout when a down-trending asset goes through a consolidation period and then continues to go down.

Reversal Breakouts

Similar to continuation breakouts, reversal breakouts begin with a halt or consolidation that follows a prolonged trend. However, the difference between Continuation and Reversal breakouts is that Reversal breakouts do not continue the same direction trend. Rather, they go in the reverse direction. This happens when traders decide that the trend has run its course. Then they push the price in the other, or “reverse,” direction.

What To Do During a Breakout

Depending on whether the breakout is a continuation or reversal breakout there are a few steps you can take.

 Continuation Breakout Tips:

A trade setup for a continuation breakout might be as follows:

  • Buy when price breaks out from its recent trading range and closes above its resistance level.
  • Sell when price tests this resistance level again and closes below it (this may happen quickly).

Reversal Breakout Tips:

Trading reversals can be tricky. As soon as you think you’ve got your strategy down, the market throws you a curveball and your prediction goes out the window.

When trading, there are times when it’s best to hold back and let the market take its course. But there are also those moments when you should be ready to jump in and take advantage of what’s happening. When a reversal breakout occurs, it can be a great time to enter a trade. That is, if you know what to look for. 

if you’re wondering whether or not to stick with your position during a reversal breakout, here are some tips:

  • Take a look at what’s happening in the market overall. If there’s been a big drop in volatility and/or an increase in volume, this could indicate that we’re close to a reversal breakout.
  • Look at moving averages or other indicators that show trends and reversals. If they start to cross over one another, this may be an indication that we’re about to see a reversal breakout happen.
  • If all else fails, just use common sense! When something doesn’t feel right about your trade anymore—if it was working well but now feels like it’s not—get out before things get worse.

How Do You Avoid Forex Fakeouts When Trading?

To avoid fakeouts in trading you must learn to use the support level, resistance level and triangle. They will help you detect a fakeout and set your stop losses and take profits.

The support level is the price at which buyers tend to enter the market. The resistance level is the price at which sellers tend to enter the market. A triangle pattern forms when both support and resistance levels are created as a result of a series of swings up or down in price.

The formation of triangles can be used to predict market reversals because it shows that buyers and sellers are evenly matched in their bids for an asset’s price movements. When this happens, it means that neither side has enough power to push prices higher or lower.

If you were looking at a descending triangle chart pattern instead, then you would want to place your stop-loss order just above resistance level because if price breaks through this point again (which would mean breaking through resistance), then it will continue falling until reaching support level again.

How to Detect a Forex Fakeout

So we know that the support and resistance levels are important tools in possibly predicting the direction of price, but how do we use them to foresee a fakeout?

By using the triangle pattern! A triangle chart pattern is created when the price of an asset moves between two horizontal lines, forming an ascending triangle. The slope of the line is flat or sideways, so it looks like a triangle on top of the price chart.

If you look at an ascending triangle chart pattern, you can see where the support level and resistance level intersect with one another. This is where you would want to place your stop-loss order because if the asset continues moving up after this point, it will break through resistance and head higher still; however, if it falls below support level, then it will continue falling until it reaches this point again (the bottom line).

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Trade the Financial markets with low fees

Can You Trade a Forex Fakeout?

So you’re a little dare-devil who wants to try to trade a fakeout! Well here’s a few tips to help you then.

Trading in the opposite direction of the breakout is known as fakeout trading, or trading a false breakout. If you think a breakout from a support or resistance level is false and unable to continue moving in the same direction, you would trade a fakeout.

If you’re going to trade a fakeout (false breakout) then it is best to trade in the direction the trend is going in. For instance, if there is an upward tendency, a triangular pattern will form. Price breaks just below the triangle before swiftly entering again. It could be a potential win to buy that transaction because the trend indicates that the price will most likely increase. In case it does not increase, make sure you’ve placed some stop losses to keep from losing too much. 

Forex Fakeouts Finale

In conclusion, fakeouts are nothing to be scared of if you know how to read the charts, trends and historical data of an asset. Being equipped with these simple tips, you may be able to see a fakeout coming and make the right decisions to protect your trades.

Are you looking to start trading with a reliable broker? Check out the different services TIOmarkets ‒ a 5-star rated broker ‒ offers and see how you can diversify your portfolio, take advantage of trading opportunities, as well as learn more about trading through our educational resources.

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Katerina is a trading, investments and business psychology enthusiast. She is a lover of coffee and all things arty, an avid supporter of small shops and start-ups, and hopes to someday master ANY yoga pose.

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