Fakeout

A fakeout is a sudden and temporary move in a market that tricks traders into thinking that a trend is emerging when, in fact, it is not.


What Is a Fakeout?

A “fakeout” is a term used in finance and trading to describe a situation where a market move appears to be breaking in a particular direction but then quickly reverses course and moves in the opposite direction. In other words, a fakeout is a sudden and temporary move in a market that tricks traders into thinking that a trend is emerging when, in fact, it is not.

Sudden shifts in market sentiment, sudden economic or news data releases, or rapid market liquidity changes often cause fakeouts. They can result in significant losses for traders who take positions based on the false signal and are often seen as a frustrating aspect of trading.

How To Spot a Fakeout?

Here are some tips to help you spot a fakeout in the market:

  1. Look for divergences: One way to spot a potential fakeout is to look for divergences between the price action of an asset and other indicators, such as the momentum or volume of trades.
  2. Monitor key levels of support and resistance: Keep an eye on key levels of support and resistance, as these are areas where fakeouts are often seen.
  3. Use multiple time frames: Analyzing an asset’s price action over multiple time frames can help you better understand its underlying trend and help you identify fakeouts more easily.
  4. Keep an eye on news and economic data releases: Be mindful of economic news releases and other events that may impact the market. These can sometimes trigger sudden shifts in market sentiment that lead to fakeouts.
  5. Use risk management strategies: Finally, it’s important to employ effective risk management strategies to limit your exposure to fakeouts and minimize your potential losses. This may include using stop-loss orders, limiting your position size, and diversifying your portfolio.

How To Trade a Fakeout?

Trading a fakeout can be a challenging and unpredictable process, and there is no surefire way to guarantee success. However, here are some strategies that traders often use to trade fakeouts:

  1. Wait for confirmation: One of the most important things to keep in mind when trading fakeouts is to wait for confirmation of a trend before taking a position. This means waiting for a clear break of support or resistance levels or a strong move toward the trend.
  2. Use tight stop-loss orders: To limit your exposure to sudden and unexpected market moves, it’s important to use tight stop-loss orders. 
  3. Trade in the direction of the trend: When trading a fakeout, it’s often best to trade in the direction of the underlying trend. Look for signals that confirm the trend and take positions in the direction of that trend.
  4. Be prepared to act quickly: Fakeouts can occur quickly and unpredictably. It’s important to be prepared to act quickly if you suspect a fakeout is occurring. Be ready to take a position or adjust your stop-loss orders in real-time.
  5. Manage your risk: Finally, managing your risk when trading fakeouts is important. Limit your position size, diversify your portfolio and use other risk management strategies to reduce your exposure to sudden and unexpected market moves.
For more information, read Breakout vs Fakeout (False Breakout) — Spot the Difference and Increase Accuracy