Fakeout

What Is a Fakeout?

A fakeout (also called a false Breakout or false Breakdown) occurs when the price moves beyond a key Support or Resistance level but fails to sustain the move and reverses back inside the prior range. Traders who entered based on the initial break are "trapped" in losing positions.

Why Fakeouts Happen

Fakeouts often occur because large institutional players push the price through a level to trigger stop-loss orders and limit orders clustered around it. Once those orders are filled, providing liquidity, the price reverses. On EUR/USD, a spike above a well-known resistance level that quickly reverses is a textbook fakeout designed to trap breakout buyers.

How to Avoid and Trade Fakeouts

To avoid fakeouts, do not enter on the initial candle that breaks the level. Wait for a candle close beyond the level, then see if the following candle holds above (or below) it. The more confirmation you require, the fewer fakeouts will trap you, although you will also miss some genuine breakouts.

Some traders intentionally trade fakeouts. If EUR/USD breaks above resistance but immediately reverses back below with a strong Bearish Engulfing candle, that fakeout becomes a short signal. The premise is that the trapped breakout buyers will now become sellers as they exit, adding fuel to the reversal. Stop goes above the fakeout high, and the target is the opposite side of the range.