8 Tips For Trading Breakouts And Fakeouts Effectively
- A breakout is when a pair’s price goes beyond the anticipated level
- A fakeout is when a pair’s price looks like it’s going to break out, but corrects at the very end
Forex Trading Breakouts And Fakeouts
Did you ever try to trade breakouts and fakeouts in Forex but then see price action do the opposite? Or perhaps you tried to trade a false break (“fakeout”) but only to see the original break succeed.
Deciding what is a breakout and what is a fakeout can be tricky. And traders often run into losses when trading them. But there is good news: traders can improve their track record by using indicators, candlesticks, and price patterns.
This article explains how traders can use these techniques to focus on the setups with the best chances. It also explains how you can try to avoid weaker setups.
What Are Breakouts And Fakeouts?
The terms breakouts and fakeouts in Forex are part of technical analysis, which studies price past and current movements on the charts of financial markets.
The goal is to focus on trade setups that offer the best odds and expected profitability in the long term.
Let’s review these concepts first. This part will review the breakouts and fakeouts definition, breakout and fakeout meaning, breakout and fakeout difference, and breakout and fakeout examples.
Trading breakouts and fakeouts explained:
- Breakouts: occur when price action is pushing or breaking through a support or resistance (S&R) level or zone. The term breakout can refer to a future or upcoming breakout, or one that is taking place right now, or one that has already occurred in the past.
- Fakeouts: occur when price action has broken through a support or resistance level but price action fails to continue with the breakout direction and reverses in the opposite direction.
- False fakeouts: are breakouts that seem to fail and look like a fakeout. But then price action still successfully manages to move into the original direction of the breakout.
How Do You Measure Breakout vs Fakeout?
Breakouts and fakeouts in Forex are important because they occur regularly. Although these 3 concepts (breakout, fakeouts, and false fakeouts) may seem confusing to traders at first.
Let’s step by step analyze Forex trading breakouts and fakeouts. First, before trading breakouts and fakeouts, it’s key to focus on finding the breakouts and fakeouts first.
The first thing a trader needs to do is identify key support and resistance levels. Support and resistance is a price level that has stopped or can stop price from moving in that direction.
- Falling prices can bounce at support or break below it.
- Rising prices can bounce at resistance or break above it.
Thirdly, a breakout occurs when price action is about to break, is breaking through, or has broken through the S&R level. A trader can decide themselves at what stage to trade the breakout – if at all.
- Strong candles that are approaching an S&R level could be a clue that a breakout is near.
- It also helps the breakout chances if price action is approaching the S&R level multiple times.
- A candle close above the resistance or below the support could confirm the breakout.
- A candle close near the high for a bullish break and near the low for a bearish breakout often indicates that the breakout is in control.
Fourthly, if price action fails to confirm the breakout, then price action could be making a fakeout.
- A candle closes far away from the high (for a bullish breakout) or from the low (for a bearish breakout) indicates weakness and a potential fakeout.
- Candle wicks also indicate a lack of strength for the breakout.
- Large-sized candles in the opposite direction of the breakout also could indicate a fakeout.
Fifthly, if price action fails to reverse, then a false fakeout could indicate that the original trend and breakout might succeed after all.
8 Techniques For Trading Breakout And Fakeout Setups
This article mentioned that traders can improve their track record by using indicators, candlesticks, and price patterns. Trading breakouts and fakeouts in Forex can be tricky. With these tools, understanding and finding breakouts and fakeouts are simplified.
Here are some charting tools that can help:
- Trend lines for spotting breakouts.
Trend lines require some patience and experience, but they offer a useful short-cut for spotting moments when price action is pushing through a key level.
- Fibonacci levels for pullbacks.
If the breakout is strong enough, then a pullback should find support at the Fibonacci levels for a bounce and continuation. A bounce at a Fib level could indicate that the breakout is not weak.
- Chart patterns for indecision.
Once chart patterns (green lines in the image below) emerge after the breakout, then this often indicates that there is no significant pressure or price movement against the breakout direction. Contracting triangles and flag patterns are usually interesting chart patterns after breakouts. A chart pattern could emerge on the current time frame or even one time frame lower.
- Strong candlestick pattern on a higher time frame.
Not sure if the breakout is working well? Then taking a pause and waiting for a higher time frame candle to close could be a smart move (blue box in the image above). The higher time frames often reveal more information about the strength or weakness of the bulls versus bears. If unsure about the breakout, then waiting for instance on the daily candlestick to emerge could remove or confirm your analysis about a breakout working out or not.
- Divergence patterns and strong S&R confluence.
A fakeout is more likely to occur if price action is running out of steam during a trend or if the breakout is taking place against the prevailing trend. Divergence patterns can play a critical role for moments when the trend and counter-trend movements are exhausted. But also finding strong support and resistance helps a lot with avoiding weak breakouts (see image below). In these moments, it could make sense to keep an eye on potential fakeouts.
- Use time patterns to measure the response.
If price action is taking too long for the breakout to materialize, then chances are that some type of retracement or reversal (fake out) could occur. In many cases, if 5 candles fail to confirm a higher high or lower low, then some type of retracement could occur (purple box in the image above). As long as the retracement is shallow, then the breakout could still continue. But any significant counter breakout price movement could severely weaken the breakout.
- The Ichimoku indicator.
This indicator offers a wide range of analytical options. A breakout above the up and down Kumo could be used for confirming breakouts. Also, the cross and the angle of the tenkan and kijun span are sometimes used by traders to determine strength.
- The Elliott Wave theory.
The Elliott Waves help traders assess and analyze the price swings with rules and guidelines. Price swings are larger parts of price action that are either quick or choppy (impulsive or corrective). Each price swing is a wave. The Elliott Wave theory allows traders to analyze the past and current price swings to forecast future price swings. Based on those forecasts, traders can then evaluate whether a breakout has a good chance of succeeding or whether it will more likely become a fakeout.
What Did We Learn From This Article On Breakouts And Fakeouts?
Hopefully, this article provides you with inspiration in understanding breakouts and fakeouts in Forex and trading, breakout and fakeout differences, and breakout and fakeout examples. Keep in mind that no method is perfect.
Usually speaking, it is best to gain experience with a couple of tools. This helps you avoid over combining too many indicators and ideas as well.
- Explanation of what is meant with breakouts, fakeouts, and false fakeouts.
- Reviewed 5 steps for measuring breakout versus fakeout.
- Discussed 8 techniques for trading breakouts and fakeouts.
What Did We Learn From This Guide On Breakouts and Fakeouts?
What Is A Breakout In Forex?
Breakouts occur when price action is pushing or breaking through a support or resistance (S&R) level or zone. The term breakout can refer to a future or upcoming breakout, or one that is taking place right now, or one that has already occurred in the past. A breakout occurs when price action breaks through or closes below the support for a bearish breakout and above the resistance zone for a bullish breakout. Deciding what is a breakout and what is a fakeout can be tricky. And traders often run into losses when trading them. But there is good news: traders can improve their track record by using indicators, candlesticks, and price patterns.
What Is A Fakeout In Trading?
A fakeout occurs when the breakout fails. Price action attempts to break through the support or resistance zone but price action does not succeed. Instead, price action retraces or reverses in the opposite direction of the breakout. False fakeouts are breakouts that seem to fail and look like a fakeout. But then price action still successfully manages to move into the original direction of the breakout. If price action fails to confirm the breakout, then price action could be making a fakeout. A candle close far away from the high (for a bullish breakout) or from the low (for a bearish breakout) indicates weakness and a potential fakeout. Candle wicks also indicate a lack of strength for the breakout. And finally, large-sized candles in the opposite direction of the breakout also could indicate a fakeout.
How Do You Trade Fakeouts?
Finding breakouts and fakeouts and then trading those breakouts and fakeouts requires some experience. Trading breakouts and fakeouts in Forex can be tricky. Most beginning traders focus on trading breakouts while avoiding fakeouts. But if traders are confident that a reversal is likely to occur at a strong resistance & resistance zone, then trading a fake out could make sense. Usually, traders wait for price action to confirm the fake breakout via reversal Japanese candlestick patterns. But there are other charting tools that can help: trend lines for spotting opposite breakouts after a fakeout, Fibonacci levels, chart patterns, time patterns, the Ichimoku indicator, and the Elliott Wave Theory.