Fake Breakouts (Fakeouts): How to Avoid the Trap
Fake breakouts occur when price breaks beyond a level but quickly reverses, trapping traders on the wrong side.
What Are Fake Breakouts?
Fake breakouts (often called fakeouts) occur when price moves beyond a support or resistance level, triggering breakout entries, then quickly reverses back through the level. This traps traders who entered on the breakout and often signals the opposite direction once the trap is set. Understanding fakeouts helps traders avoid losses and even profit from the reversal.
What a Fakeout Looks Like
A fakeout has four stages:
- Setup: Price approaches a significant support or resistance level
- Breakout: Price moves beyond the level, often with initial volume
- Reversal: Price stalls and begins moving back through the level
- Failure: Price closes back inside the prior range, invalidating the breakout
The key is that the breakout doesn't hold. Price briefly pokes beyond the level but lacks the conviction to sustain the move.
What They Signal
Fakeouts signal that the breakout lacked genuine momentum. Often, large players use these false moves to fill orders at favorable prices — selling into the buying pressure of breakout traders or buying into the selling pressure of breakdown traders. Once the trap is set, price usually reverses sharply.
A failed breakout often produces a stronger move in the opposite direction than a successful breakout would have in the original direction.
How to Identify and Avoid Fakeouts
- Wait for the close. Don't enter on intraday spikes — wait for a daily close beyond the level.
- Check volume. Real breakouts have high volume; fakeouts often have average or lower volume.
- Look for follow-through. A real breakout shows continued momentum the next session.
- Use multiple confirmations. Combine price action with indicators like RSI or moving averages.
How to Trade Fakeouts
- Identify the fakeout when price breaks a level but fails to hold.
- Wait for the reversal. Enter when price closes back inside the prior range.
- Trade in the opposite direction of the failed breakout.
- Place your stop-loss beyond the extreme of the fakeout.
- Target the opposite side of the prior range.
Trading Example
A stock breaks above resistance at $50, reaching $51 intraday. Traders enter long. But price stalls, fails to hold above $50, and closes at $49.50 — a fake breakout. Traders who recognize the fakeout enter short with a stop above $51, targeting a move back toward support at $45.
Common Mistakes
- Entering on intraday breakouts without waiting for a close
- Ignoring volume as a confirmation tool
- Holding losing breakout positions too long, hoping they recover
Fakeout Warning Signs
| Warning Sign | Description |
|---|---|
| Low volume | Breakout lacks conviction |
| Quick reversal | Price fails to hold beyond the level |
| No follow-through | Next session shows no momentum |
| News-driven | Spike was caused by temporary news |
Trading fakeouts is popular among experienced traders because failed breakouts often produce powerful reversals, and the trap itself provides a clear signal once recognized.