What is the difference between a breakout and a fakeout?

What is the difference between a breakout and a fakeout?

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1 answer

by matteo.zboncak , a year ago


A breakout and a fakeout are terms commonly used in financial markets, especially in technical analysis. They refer to specific price movements and can have different implications for traders.

  1. Breakout: A breakout occurs when the price of an asset moves above a key resistance level, or below a key support level. It signifies a significant shift in market sentiment and often indicates the beginning of a new trend. Breakouts can be seen as a bullish sign when the price breaks above resistance or a bearish sign when it breaks below support. Traders often view breakouts as a potential opportunity to enter a trade in the direction of the new trend.
  2. Fakeout: A fakeout, also known as a false breakout or whipsaw, is when the price briefly moves above a resistance level or below a support level but quickly reverses and moves back within the previous trading range. It is a deceptive move that traps traders who anticipated a breakout. Fakeouts can occur due to market manipulation, lack of buying or selling pressure, or unexpected news/events. Traders who enter a trade based on a fakeout may experience losses as the price reverses.

In summary, a breakout is a genuine move that breaks above resistance or below support, indicating a potential trend change. On the other hand, a fakeout is a false move that deceives traders by briefly breaking above resistance or below support before reversing back into the previous range. Traders need to be cautious and may use additional technical indicators or confirmation to distinguish between genuine breakouts and fakeouts.