You see a strong Resistance level. Price hits it, breaks through aggressively, and closes above it.
You think: "The resistance is broken! Buy! Buy!"
You enter the trade. Five minutes later, the price reverses, crashes down, and hits your Stop Loss.
Congratulations, you just became Liquidity for the Smart Money.
This phenomenon is called a Fakeout (False Breakout). In this guide, we will learn why they happen and how to stop falling for them.
1. Why Fakeouts Happen (The Liquidity Theory)
To understand Fakeouts, you must understand how Banks trade.
Banks trade with billions of dollars. They cannot just click "Buy" whenever they want. They need someone to Sell to them.
The Process:
- Banks want to Sell (Short) the market.
- They see a Resistance level where retail traders have placed their Stop Losses (Buy Stops).
- They deliberately push the price above the resistance.
- Retail traders see the breakout and start Buying. Stop Losses are triggered (which are also Buys).
- Liquidity Unlocked: The Banks now have a flood of Buyers. They sell their billions into this buying pressure.
- Price crashes back down.
2. Sign #1: The "Build Up" (Real Breakout)
How do you distinguish a Real Breakout from a Fakeout?
Look for the Build Up.
If price shoots straight up like a rocket and breaks a level without pausing, it is usually a Fakeout (Exhaustion).
A Real Breakout usually consolidates just below the resistance level first. It "coils" like a spring, gathering energy to break through.
Rule: No Build Up = No Breakout.
3. Sign #2: The Candle Close (Timeframe matters)
Are you trading a breakout on the 1-minute chart? Stop it.
A breakout is only valid if the candle CLOSES above the level on a Higher Timeframe (H1 or H4).
- Wick above Resistance: Rejection (Fakeout).
- Full Body Close above Resistance: Potential Breakout.
4. Strategy A: The "Retest" Entry (Conservative)
Never buy the initial breakout. You are chasing price.
The Step-by-Step Plan:
- Wait for price to break the level clearly.
- Do nothing. Let the FOMO traders enter.
- Wait for price to come back down to the broken level (The Retest).
- If the level holds as new Support, enter Buy.
If price crashes back below the level during the retest, you just saved yourself a loss.
5. Strategy B: Trading the Fakeout (Aggressive)
This is my favorite strategy. Instead of being the victim, be the predator.
The "Turtle Soup" Setup:
- Identify a clear Resistance level.
- Wait for price to break above it aggressively.
- Watch for an immediate strong Bearish Candle (Engulfing or Pinbar) that closes back inside the range.
- SELL immediately.
- Target the bottom of the range.
Why this works: You are selling exactly when the trapped buyers are panic-selling their positions.
6. Volume Confirmation (Optional)
If you use trading volume (available on Futures or some Brokers):
- Real Breakout: High Volume on the break candle. (Aggression).
- Fakeout: Low Volume on the break candle. (No institutional interest).
Final Thoughts
The market is a machine designed to punish impatience.
When you see a breakout, assume it is a trap until proven otherwise.
Wait for the Build Up, or wait for the Retest.
Learn where the "Traps" are usually located: Supply and Demand Zones Guide