How to Identify Fake Breakout

What is a Fake Breakout and how to recognize it on the charts?

Dear friends, we extend a warm welcome to all of you on the traderintelligent blog. Our objective in this article is to provide you with comprehensive information on the concept of "fake breakout" in a manner that is easy to understand, accompanied by relevant examples. Throughout this piece, we will enlighten you on the crucial aspects surrounding the "fake breakout chart" and the process of identifying such deceptive patterns. It is of utmost importance that you read this article in its entirety, as incomplete knowledge can prove to be extremely hazardous.

 

What is a Fake Breakout and how to recognize it on the charts?

To begin with, it is essential to understand the concept of a fake breakout. In simpler terms, a fake breakout refers to a scenario where the price surpasses a resistance level and closes above it, only to quickly retreat without relying on the Support of the Resistance. In such circumstances, we can conclude that a fake breakout has taken place. If you are unfamiliar with the concepts of support and resistance, we have provided a comprehensive article on the subject. Rest assured, this article will equip you with a thorough understanding of fake breakouts. Now, let's delve into an illustrative example.
  

Fake Breakout of Nifty 50

In the above picture, you can observe the 15-minute chart of Nifty 50. Initially, the price encountered resistance, but eventually, the green candle closed above that resistance level. This triggered buying activity among traders who anticipated a breakout. However, the price subsequently experienced a sharp decline, revealing the breakout to be false. Although the initial signs were positive, with a solid green candle breaking through resistance, there is more to the story that will be revealed later on.

To recognize fake breakouts

• It is essential to have a good understanding of support and resistance levels. Without this knowledge, identifying fake breakouts can be challenging. By paying attention to certain price patterns and exercising patience, spotting fake breakouts becomes easier.
• First of all, mark all the resistance levels with horizontal lines.
• Do not think of taking a trade immediately after a breakout.
• The breakout candle should be a full bodied and large candle.
• If an inside candle is formed immediately after the breakout candle and its low is broken, then you should be alert. Because the chances of fake breakout will increase.
• After the breakout candle, if the price keeps moving at the same place and keeps forming small range candles, then you should understand that buyers can be trapped here.
• Instead of taking a trade immediately after the breakout candle, you should plan a trade on the retest.
• It would be better if there are follow up candles after the breakout candle because there are stop losses of the sellers which start getting cut and the chances increase that the price will take support on retest.

Fake Support Breakdown

It is important to differentiate between breakout and breakdown in trading. Breakouts are linked with resistance, while breakdowns are linked with support. A fake breakdown of support indicates that the support level has been breached, providing clarity for traders. This concept contrasts with a resistance breakout.

   

Fake Breakdown of Nifty 50

By analyzing the image, it is evident that the price experienced a significant increase after breaking a support level without retesting. This sudden movement can be attributed to sellers getting trapped in the market. It is essential to stay alert as fake breakouts and breakdowns are prevalent in chart patterns. Recognizing potential trading opportunities in these situations is key.

In conclusion, we trust that this article has provided you with a comprehensive understanding of fake breakouts. It is highly recommended to practice fake breakouts extensively in order to witness a significant improvement in your trading skills. By mastering the ability to identify fake breakouts, you will also gain the chance to engage in profitable trades. However, it is crucial to emphasize the importance of practice before taking any action.