BREAKOUTS VS FAKEOUTS

When it comes to catching market's biggest moves, one has to have a grasp on the working of breakouts as they're the fuel which runs the significant market moves. While chasing breakouts, we often end up entering pseudo breakouts i.e., fakeouts. In fact, 90% of the breakouts which we see in a real time market are false breakouts. Thereafter, trading breakouts becomes hell of a task for traders due to the high risk. 

 

What Are Breakouts? 

 

Starting off by understanding what a breakout truly is. It's nothing more than a normal market move, but breakouts are quite aggressive than the regular market moves. Breakouts are a sudden surge of market with high momentum which are seen not too often (unless you're trading in a volatile market). As simple as that. 

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Understanding Psychology Behind Breakouts 

​

Now, you might ask yourself, why are breakouts even a thing? What's the psychology behind them? Well it's quite simple.  One of the reasons behind breakouts is the continuous retesting of a level. Breakout is the key to break this steady consolidation. Expanding the list, if the price moves a little above or below that specific retesting level, buyers/sellers enter the market in bulk. This causes the market to further extend itself into the mainstream direction, helping the breakout being pushed into the same direction. Another reason could be the stop losses being hit just above/below the retesting level. Subsequently, the squaring off of the positions would again push market above/below the resting level. 

​

 

 

Finding The Difference Between Breakouts and Fakeouts 

​

One of the key points to consider while ruling out the difference between breakouts and fakeouts is to make sure the market has undergone a consolidation. This consolidation serves as a market bubble which ideally collapses the moment market goes up the retesting level, i.e., when breakouts are seen. 

​

​

 

Another considerable remark is checking whether the breakout candle (the candle shattering the previous market suppression) has a bigger body than the last 20 candles. If the candle breaking the congestion has a body  bigger than that of the last 20 candles, then there's a fair chance of the breakout being a real one. 

​

​

 

There are often some random moves in the market which we confuse with breakouts. If these moves are in a direction opposite to that of the major trend, then they most likely fall into the category of pseudo breakouts or fakeouts. Even when these moves  might sometimes go profitable (which is less likely to happen unless the environment is extremely volatile), it's best adviced to not get caught up in them in order to avoid unnecessary losses.