Learning how to trade under various market conditions is extremely important to getting the most out of the market no matter exactly what is going on at any given time. You may need to learn how to trade fakeouts so you don’t end up in a place where you get whipsawed by the market and end up losing money on your trade.
Potential fakeouts can be spotted ahead of time — usually at support or resistance lines — and you can potentially keep yourself from making the wrong decisions when it comes to how you will trade it.
One of the most important things to look at when trading fakeouts is that there should be space between the trend lines and the price of the pair. When there is space between the trend line and the price, it means that the price is still moving in the direction of the overall trend.
The other thing to keep in mind is the speed of the price movement away from the trend line. If the price is slowly moving away from the trend line, then you may be looking at a false breakout. When movement is faster towards the trend line, then a real breakout may be about to take place. If the movement is fast like this, then you may want to take a breather and not try to trade something moving quite as quickly as this. You may end up in a situation where you are on the wrong side of the trade quite quickly. Steer clear.
So, what do you do when you want to trade the fade? You just need to wait until the price moves back within the trend lines. That is when you know that the fade is on and that the fake out may be something that you can trade.
You can look for chart patterns that are known to traders to be indicative of different types of price action. There are plenty of people who have seen various chart patterns materials over the years that directly tie in to a specific type of movement in the market. You might look for well-known patterns such as:
- Head and shoulders
- Double top/Double bottom
These types of patterns have been seen time and time again, and they are often found to correspond with certain types of actions in the markets. Make sure you look at this as a potential situation where you can take advantage of the way that the market is moving.
Head and shoulders are often create fakeouts (false breakouts) and thus good opportunities for fading breakouts. Why? False breakouts frequently happen with this pattern because many traders who have spotrted the formation usually put their stop-loss close to the neckline.
False Breakouts are Common
One of the things that you may discover in time is that false breakouts are common in the market. The reason being because there are so many traders who place orders right on the trendline in order to get in or out of a trade at exactly the same point that they believe will be when others bail out. Make sure you look out for those false breakouts so you know where you need to bail out of your own trade and perhaps make some money on the fade.
Institutional traders are often great at peeling off pips from retail traders by understanding how false breakouts work and what they need to do to make sure they get the best potential profits for themselves. You can look over all of the patterns and potential to capitalize on the pips that are just sitting out there when a false breakout begins to emerge.
One final thing to think about is making sure you don’t place your trades at exactly the same numbers as all other traders. There are too many people who line up their trades at exactly the same price points, and they end up losing pips to institutional traders who know that others are going to do this, and they will scrap away all of the pips that are left out there by retail traders. Change your approach and you might not give up so many pips.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.