If you consider a breakout to be fake and has no or very few chances of keeping in the same direction as a break you can trade it to.
Trading fakeouts is a bit tricky because a breakout may fail on its first attempts but end up succeeding in the long run. With this kind of character they have to be traded as very short term strategies therefore don’t work for longterm traders.
When you have mastered how to deal with fakeouts you will be able to avoid premature knockouts and losses.
Because all traders are looking at these levels of breakouts with high expectations, it tends to be a self fulfilling prophesy. But since we don’t live in a perfect world, shortcomings appear sometimes and the prophesy is not fulfilled. Support and resistances levels are looked at as price ceilings and floors so when there is a price break on any of the levels every trader expects price to first rally in the same direction as the break and ofcourse if this happens you either buy high above the broken resistance or sell low below the support expecting big gains. Due to our greedness by nature we forget to cater for errors and end up in a mess. We tend to behave as if we are living in a perfect world which is not the case.
So as you look forward to catch up that big move after a breakout you should bear this in mind that breakouts can fail sometimes. Reason being 5% big traders in the market are also smart actually. They have to make money from the 95%, the majority small individual traders. They are also a ware of these levels and therefore if everyone has to buy above the resistance or sell below the support there has to be some one to take the other side. So this is what happens. The guys holding these accounts and taking the opposite of these trades are infact the market makers. So unders such conditions they take the other side of the trade to balance the equation which causes a pull back on the breakout and most of the small traders are shook out of the market with their stops being hit. Everyone is smart but when it comes to trading you have to play smarter and behave like the 5% traders and trade with the more experienced traders. That’s how you will increase more odds to your side.
How to trade fakeouts
The fakeouts can be traded the same way we do for breakouts only that this time we shall take the opposite direction to a breakout so we can treat them as reversal. A false breakout is short lived so has to be traded as a short term strategy. Trade when you have already confirmed that it is actually a failed breakout and have your target a bit close.
Trading a false break is not any different from the way we treat reversals. For instance when price breaks a resistace levels and doesn’t continue in the break out direction, we wait to take a sell position below the resistance. Let’s take a look at an example below.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...