If you do not what Fake Out mean, this article is for you. Today we will talk about what does Fake Out mean and how to spot it. Let’s find out by reading the article below.
What does Fake Out mean?
Fakeout is a term used in technical analysis to refer to a situation where a trader takes a position in anticipation of a future trading signal or price movement, but the signal or movement never develops and the asset moves in the opposite direction.
Fakeouts can cause considerable losses to technical analysts. These investors typically rely on well-tested patterns, multiple confirmations of indicators, and specific perks to protect against significant losses. Sometimes the setup looks perfect, but external factors can cause the signal not to develop as planned.
How to spot it?
Potential false breakouts often occur at support and resistance levels formed through horizontal or sloping trendlines, moving averages, chart patterns, Fibonacci levels, etc.
A breakout of the support line is a bearish sign that the price may continue to fall. On the other hand, a breakout of the resistance line is a bullish sign that the price may rise further as buyers overcome sellers.
Unfortunately (or fortunately, if you know how to deal with them) breakouts tend to happen if other indicators don't support them.
One of the indicators that you should focus on is the volume indicator:
- Breaking lows or falling volume is likely a fake move
- A breakout high or increased volume could be a real breakout
Another difference between a valid breakout and a false breakout is with the help of the RSI, a momentum indicator that measures the strength behind a move by measuring the speed of the move. If the RSI is increasing and making higher highs and higher lows, it means that momentum is building, while lower lows and lower highs indicate that the trend is losing momentum.
- If the price is breaking out and the RSI is building momentum, then you may be dealing with a valid breakout.
- If the price breaks out and the RSI shows downward momentum, you may be dealing with a false breakout.
I hope this article will help you to learn what does Fake Out means and how to spot it. Fakeouts can lead to significant losses, so professional traders always use stop losses to control risk. Deciding whether you should also use a stop loss is an easy task.
