Many traders rely on breakouts as key trading opportunities. The logic is simple: when price moves beyond a well-defined support or resistance level, it signals strength and continuation. However, markets are deceptive, and more often than not, these breakouts turn into fakeouts—also known as false breakouts or traps.

A fakeout occurs when price briefly breaks a key level, triggers breakout traders into positions, and then reverses sharply in the opposite direction. This traps traders on the wrong side, often leading to stop-loss hits and unnecessary losses.

Fakeouts are particularly frustrating for traders who follow textbook breakout strategies because they often get stopped out right before the market moves in their original direction. However, these false breakouts aren’t just random occurrences—they happen due to liquidity grabs, institutional trading strategies, and market psychology.

Why You Need to Understand Fakeouts

Understanding how and why fakeouts occur is a crucial skill for price action traders because:

• Fakeouts trap retail traders, and recognizing them early helps you avoid costly mistakes.
• Fakeouts offer high-probability reversal setups for traders who can spot them in real-time.
• Fakeouts reveal where liquidity exists—a key factor in how institutions trade.
• Learning to trade against fakeouts allows you to think like professionals rather than follow the herd.

This article will break down what fakeouts are, why they happen, how to identify them, and most importantly—how to avoid getting trapped and profit from them instead.

 

What is a Fakeout in Price Action?

Definition:

A fakeout (false breakout) occurs when price briefly moves beyond a significant level (support, resistance, or a trendline) but fails to continue in the breakout direction and reverses, trapping traders who entered on the breakout.

Fakeouts happen in all markets, asset classes and across all timeframes, making them a universal challenge for traders.

 

Why do Fakeouts Happen?

Four main reasons are cited in the trader literature, for each of these explanations as to what may be happening and examples will be given.

1. Liquidity Hunting (Stop-Loss Grab by Institutions)

Large institutional traders execute massive trades that require a significant number of buy or sell orders to fill their positions. Since liquidity is invariably concentrated either side of key levels, institutions will often trigger stop-losses before reversing price.

How this works:

• Retail traders place stop-losses just beyond support and resistance.
• Smart money (institutions and market makers) push prices beyond these levels to trigger stops and create liquidity.
• Once stop orders are triggered, institutions enter their own trades at optimal prices before reversing the move.

 

Example:

EUR/USD is trading near strong resistance at 1.1000. Many traders expect a breakout and place buy orders above this level. Meanwhile, traders who are short have stop-losses above 1.1000.

Institutions push prices just above 1.1000, triggering stop-losses and breakout buy orders. As soon as enough orders are activated, institutions reverse the price downward, trapping long traders.

 

2. Retail Trader Traps (Herd Mentality Exploitation)

Retail traders often trade breakouts in predictable ways, meaning their behaviour is easy for professionals to manipulate. Many use simple breakout strategies, where they enter long trades above resistance and short trades below support.

Institutions exploit this retail behaviour by triggering these breakouts and quickly reversing price, often resulting in retail traders exiting trades in panic.

Example:

• Price approaches a well-established support level at $50.00.
• Retail traders place buy orders right at $50.00, expecting a bounce.
• Instead, price briefly dips below $50.00, stopping out traders who had tight stop-losses below support.
• The market then rebounds strongly, leaving stopped-out traders frustrated and missing the real move.

 

3. Market Manipulation (Whale Activity & Stop Runs)

Large market participants, often called whales, engage in strategies that artificially create breakouts to lure in traders. This is a more aggressive form of liquidity hunting.

How whales manipulate price:

• They place large fake buy or sell orders to create an illusion of demand or supply.
• Retail traders react by jumping in on the breakout, adding liquidity.
• Once enough traders enter, whales reverse the move and trap breakout traders.

Example:

Bitcoin breaks above $100,000, attracting thousands of breakout traders. Shortly after, price suddenly dumps to $98,500, triggering stop-losses before eventually rallying higher.

 

4. Low Volume Breakouts (Weak Buying/Selling Pressure)

A true breakout should be accompanied by strong volume, confirming that buyers or sellers are committed to pushing the move further. Fakeouts often happen when price breaks a key level but lacks volume, signalling that the breakout is weak and likely to fail.

How to Spot Low Volume Fakeouts:

• A breakout occurs on low volume, meaning there is no real buying or selling pressure behind it.
• Price moves beyond a key level but quickly returns inside the previous range.
• A sudden spike in volume after a reversal confirms that institutions entered against the breakout.

Example:

Gold breaks above major resistance at $2,700 but does so on low volume. The price moves slightly higher but quickly falls back below $2,700, confirming a fake breakout.

 

How to Avoid Getting Caught in Fakeouts

There are three VITAL ways in which you can look to reduce the chance of getting caught in a fakeout. These are as follows:

•  Wait for Confirmation Before Entering Breakout Trades

One of the biggest mistakes traders make is entering trades immediately after a breakout. A breakout should be confirmed before entry, or it risks being a fakeout.

How to confirm a breakout:

• Wait for a strong candle closing beyond the breakout level on your relevant timeframe (ideally over multiple timeframes rather than taking action intra-candle before it is mature. Acting on candle bodies rather than wicks as a general rule may be prudent.
• Observe whether price holds above support/resistance on a retest. It is thought that up to 35-40% of breakouts will retest so being patient and allowing your trade to breathe may be worth exploring. Obviously, a continued move back through a ley level may be a different signal i.e. of a fakeout.
• Look for multiple confluences (trend alignment, volume confirmation, and price action signals).Note: this may take some time and significant testing to find the right set of confluence factors that are optimum for your trading style and risk tolerance

 

2,  Using Volume as a Confirmation Tool

Volume provides a clear indication of breakout strength and is a real time indicator rather than lagging. A real breakout, that may give the best chance for a positive outcome, should have rising volume, while a fakeout often occurs on weak volume.

How to use volume confirmation:

• If volume increases significantly during a breakout, the move is likely real.
• If volume remains low, the breakout is suspicious and may fail.
• A spike in volume on the reversal suggests a fakeout has trapped traders.

Example:

A breakout above a key level occurs on low volume, suggesting that buyers are not fully committed. Shortly after, price falls back inside the range, confirming a fakeout.

 

3. Trade in the Direction of the Higher Timeframe Trend

Fakeouts are more common when a breakout occurs against the prevailing trend.

How to use trend confirmation:

• If the higher timeframe trend is bullish, avoid short trades on a minor timeframe breakout.
• If the higher timeframe trend is bearish, avoid chasing upside breakouts.

Obviously one of the challenges is to determine which is the appropriate longer timeframe(s) to use for your chosen primary trading timeframe. To give an extreme example, it hardly seems rational to use a daily timeframe to check for a 5-minute timeframe trade, in such a case an hourly trade may be more logical.

Example:

A daily chart shows a strong downtrend, but the 1-hour chart shows a bullish breakout. Instead of going long, wait for a fakeout and trade the reversal in the trend direction.

 

How to Profit from Fakeouts (Taking advantage of potential “trapped” Traders)

As with all trading activity the aim to give yourself a potential edge, i,e an advantage over other market participants. There are always winners and losers, your responsibility of course is to make sure you are on the right side of that.

Therefore, considering how you may act more as the institutional professional trader may do and take advantage of such fakeouts could put you on the right side of the market moves.

Part of this, albeit at an intermediate level, could be to look at strategies that may offer opportunity when price has failed to breakout. 

I will briefly outline the thinking behind two of the more common approaches to achieve this in step-by-step format.

1. The Fakeout Reversal Trade
   1. Wait for the fake breakout to occur.
   2. Look for rejection candles.
   3. Enter a trade in the opposite direction.
   4. Set your stop-loss above/below the fakeout wick.
   5. Target a logical exit point (previous support/resistance).
2. The Liquidity Trap Setup
   1. Identify key liquidity zones where fakeouts are likely.
   2. Look for aggressive price spikes followed by quick reversals.
   3. Enter against the breakout once confirmation occurs.

 

Summary

Fakeouts are a common market phenomenon that trap traders who enter breakouts too early. By waiting for confirmation, using volume analysis, and understanding liquidity grabs, traders can avoid being trapped and even profit from fakeouts.

Remember the following key points from this article as you move forward:

1. Fakeouts are not random—they happen because of institutional liquidity hunting.
2. Volume, trend alignment, and confirmation candles help filter fake breakouts.
3. Fakeouts may offer high-probability reversal opportunities if traded correctly.

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