What is Fakeout?

Fakeout is a misleading signal. It’s commonly used by traders in technical analysis (TA). In essence, a trading analyst experiences a fakeout when they enter a trading position with the assumption that the price will go in a specific direction, and it doesn’t. In most cases, the price moves in the opposite direction than the one predicted. 

Generally, those who apply technical analysis rely on price trends and patterns to establish the most favorable trading opportunities aligned with their trading strategy. Sometimes it may seem that everything is going according to plan, but unforeseen external factors muddle up the trading waters. In turn, fakeouts can be detrimental and lead to substantial losses. 

There are plenty of strategies developed to minimize the risk and impact of fakeouts. Firstly, traders must understand the risk management basics. It’s important to have a way out of an unfavorable market. This can be done by preparing an exit strategy in advance as well as to placing stop-loss orders.

It’s beneficial to rely on more than one technical indicator before entering a trading position. A single signal shouldn’t be used as an indicator to trade since there are so many variables. When more than one signal points in the same direction, then it could be favorable. However, you should always keep in mind that no signal is a 100% guarantee that the trade will be successful. 

You can also keep the trading risk small by trading in small amounts. Most traders follow the unwritten rule of not investing over 1% of their capital in one trade. This ensures that, in case of a fakeout in a specific trading position, they will lose only that 1%.

The term also has another meaning. Fakeout is sometimes used interchangeably with a false breakout which describes a short-term break in the price.