It is a general perception among Forex traders that the fakeouts are caused by the banks and large institutional players to stop retail traders players from moving the market in their desired directions. Although there is no evidence to prove this theory, we believe it is true. The manipulation is done by the big players. A fakeout is simply a failed breakout, and most of the time, they occur at significant areas like support, resistance, trend lines, Fibonacci retracement levels, and chart patterns, etc.
Typically, fakeouts are the result of a battle between both the parties on the price chart. So if you are witnessing a range and if we see both the parties printing aggressive candles, we can expect more fakeouts. The same applies to the trending markets as well. The aggressive battle between the buyers and sellers for domination leads to frequent fakeouts.
It is a common perception that it is impossible to trade these fakeouts, but that is not true. We can trade fakeouts, but a lot of market understanding is required to do so.
The image below indicates a fakeout followed by an actual breakout in the EUR/GBP Forex pair.
As we can see below, when the price breaks above the breakout line, it started to hold there. If it didn’t hold, it means that the price goes above and came back into the range. So in our case, hold above the breakout line confirms that the price is not going to fake out, and riding the buy trade from here will be a good idea.
The image below indicates a false breakout in this Forex pair.
As you can see below, we choose to enter a buy trade after the price action fakes below the major support area. We can see that it is eventually coming back and holding at the support area. This holding support clarifies that the sellers failed to move the market.
Now buyers are coming back and holding the market to go for a brand new higher high. We can see that price action respecting the trendline for a while, but then it breaks above the line, printing a brand new higher high.
The image below indicates the appearance of a faker on the EURGBP sixty-minute chart.
The image below represents our entry, exit, and stop-loss in this Forex pair. The pair was in an uptrend, and as it tries to go above the resistance line, it immediately came back and stated holding below the resistance line. This confirms the faker, and after our entry, prices go back to the most recent lower low.
That’s about identifying Fakeouts and how to trade them. Please be sure to trade these fakeouts only when you are absolutely sure about them. All the best.