How to Detect Fakeouts in Trading

How do you detect fakeouts in trading?

Wouldn’t you like to have some way of knowing that what you are viewing in the market could reasonably be defned as a fakeout? That is to say, a breakout that never truly takes hold. This is exactly the kind of thing that many traders wish they had some kind of indicator for.

Their belief is that, if they could just fgure out when the market was truly breaking out and when it was just producing false signals that didn’t truly add up to a breakout, then they could determine for themselves which way things were likely to go.

It is not uncommon to see resistance and support levels broken and believe that a breakout is on the way only
for the market to react in the completely opposite direction. When this occurs, it can take a lot of the profits that a trader might have otherwise made down with it.

How do you Detect Fakeouts in Trading?

Support and Resistance Levels Can Be Deceptive in Detecting Breakouts

Support and resistance levels are always extremely tricky to figure out. As much as we might want to be able to determine where these levels are likely to be, the reality for most of us is that predicting where price may find support or resistance is never easy.

Support Levels

These are levels where a currency pair is believed to have enough buying support to keep it held steady at a certain price.

It may be a buying opportunity when the price hits up against these levels — and even sometimes if they are broken slightly.

Resistance Levels

There are also price levels that are difficult to be broken through. These are known as resistance levels, and they work in the opposite way.

They are a price at which the trader believes it is unlikely that they will see continued buying. They may be the right place to put in a sell order, or at least to halt your buying. Like strong support, strong resistance levels often maintain their level, even if slightly broken.

So how to figure it out what it is : the breakout or fakeout ?

There are two simple methods that work most of the time :

1. Watch for the close of the bar in time frame you are working on ( and if necessary next bigger time frame – you are working on 30 min chart – check also 1h chart ).
2.  Always wait for the confirmation –  Two consecutive bars , and act on the third one.   

We have other confirmation methods, but they are all more complicated to use , so for now we’ll pause on these two.