“False breakage,” or a false breakout (or fake out), is a market phenomenon in trading where the price of an asset briefly moves beyond a key technical level, such as support or resistance, but then quickly reverses and closes back inside the established range. This traps traders who acted on the initial breakout, forcing them to exit and often fuelling the price reversal.
A false breakout is a significant movement out of a market’s normal support or resistance levels that doesn’t last – hence it ‘fails’ These can cause costly mistakes for traders, thinking a market has hit a true breakout and going long, only for it to lose momentum shortly afterwards.
A fakeout is a deceptive movement or signal that leads others to believe a trend or action is happening, only for it to reverse unexpectedly. This term applies in both financial trading, where it’s a price movement that momentarily breaks support or resistance but quickly reverses, and in Pokémon, where “Fake Out” is a move that causes flinching on the first turn a Pokémon is sent out.
-
1. Breaching a Level:Price moves above resistance or below support, a level that was previously holding the market.2. Trapped Traders:Traders who believe the breakout is genuine enter the market in the direction of the new trend.3. Market Reversal:The price quickly reverses, moving back into the old range.4. Liquidity Sweep:This reversal often occurs as large players engage in a “liquidity sweep” to trigger stop-loss orders and gather liquidity from the trapped traders.5. Momentum Shift:The forced exits from the trapped traders add momentum to the reversal, solidifying the false breakout.
- The Break: The price suddenly spikes to $50.50.
- The Fakeout: Buyers enter, expecting a continued rise.
- The Reversal: The price then quickly falls back to $49.50, leaving the recent buyers with losses and trapping them in a losing trade.
-
To Manipulate the Market:Large institutions may create a false breakout to collect liquidity from the stop-loss orders of retail traders.
-
Weak Momentum:A breakout might be driven by insufficient buying or selling pressure to sustain the new trend.
-
Market Volatility:False breakouts can occur during high volatility, especially around significant news events.