A fakeout in forex trading occurs when the price temporarily moves beyond a support or resistance level, giving traders a false breakout or breakdown signal before reversing.

This can lead traders to enter positions expecting a sustained movement, only to see the market turn against them.

A fakeout is also known as a “false breakout” or a “failed break“.

Fakeouts are common in forex markets due to liquidity, volatility, and market manipulation. Recognizing them can help traders avoid unnecessary losses and refine their trading strategies.

Basic Trading Concepts

Before diving into fakeouts, as a trader, you should understand some key market principles, and they include:

Support and Resistance Levels 

Its a price point where buying or selling pressure prevents further movement, and the market is consolidating.

Breakouts and Breakdowns 

Its when the price moves beyond support or resistance, signaling a potential trend.

Trend Following

Trading in the direction of a prevailing market trend to maximize profits.

The Mechanics of a Fakeout

Fakeouts happen when the price briefly exceeds support or resistance and then reverses. This can be triggered by the following reasons:

Price Action Exceeding Support/Resistance

The price breaks a key level but fails to hold.

Sudden Changes in Market Sentiment

Economic news or geopolitical events cause rapid price shifts.

Market Manipulation (Stop-Loss Hunting)

Large players push prices to trigger stop-loss orders before reversing.

Volatility

Sudden price swings create misleading signals.

Types of Fakeout

1. Bullish Fakeouts (False Breakouts)

The price moves above resistance, attracting buyers.

Instead of continuing up, the price falls, trapping traders in losing positions.

2. Bearish Fakeouts (False Breakdowns)

The price breaks below support, prompting traders to sell.

Instead of dropping further, the price reverses, forcing traders to cover losses.

Conclusion

Fakeouts are a common occurrence for technical analysts, regardless of the indicators they use. To reduce the risk of fakeouts, many technical analysts usually place limits on the total amount of their investment that they wager on each trade.

A common limit for investment trades is 2% of portfolio risk. Technical traders will also typically set stop-loss orders on trades at a specified level to ensure that losses are managed if they do occur. The idea here is to be prepared for any potential outcome prior to putting on a trade.

Related term

Support And Resistance