In the world of technical analysis, a "fakeout" is one of the most deceptive patterns for traders, but it can also be a golden opportunity for those who understand it well.
What is a fakeout?
It is a price movement where prices break through a key resistance (or support) level, misleading traders into thinking a new trend is beginning, but it quickly reverses back to the previous range.
Why does the fakeout happen?
1️⃣ Weak overall market: There may not be enough momentum to sustain the rise.
2️⃣ Strong selling pressure: The presence of large sellers at resistance levels brings the price back down.
What comes after the fakeout?
· The stock may retreat to its previous base and stabilize near the moving averages.
· Formation of higher lows or trading in a tight range may indicate accumulation and readiness for a new upward attempt.
How can you benefit from this pattern?
✔ Wait for confirmation: Don’t rush to enter with the first breakout, but wait for a close above/below for several sessions.
✔ Use indicators: Moving averages and trading volume may help filter out false signals.
✔ Risk management: Set a stop loss below the last low when buying, or above the last high when selling.
📈 The chart in the image illustrates a practical application of this concept using candlesticks and moving averages, where the trader attempts to analyze the fakeout before making a trading decision.
