top of page

How To Identify False Breakouts

Identifying fakeouts is a critical skill in trading, as they often trap retail traders into making poor decisions while allowing institutions and experienced traders to profit. A fakeout occurs when the price breaks through a key support or resistance level, tricking traders into entering positions, only for the price to reverse quickly. Institutions use this technique to generate liquidity by triggering stop-loss orders and luring traders into false breakouts.




Here’s how you can identify fakeouts and avoid falling into the trap:


1. Analyze Volume during the Breakout

Fakeouts are often accompanied by a brief increase in volume that doesn’t sustain after the breakout. When a genuine breakout occurs, volume tends to spike and remain elevated as traders continue to enter the market. In contrast, during a fakeout:

- You’ll see a sharp but short-lived volume spike as retail traders and stop-loss orders are triggered.

- The volume will quickly dry up after the breakout, signaling that institutions are not participating in the move.


How to Identify:

- If price breaks through a support/resistance level with low or unsustained volume, it's likely a fakeout.

Pro Tip:

Watch for **volume divergence**—if price is making a new high (or low), but volume is not confirming the move, this could signal a potential fakeout.



2. Watch for Price Rejection or Quick Reversals

Fakeouts usually cause the price to break past key levels, only for it to quickly reverse. Here’s how to spot it:

- If price breaks above resistance or below support but immediately returns to the range or zone within a few candles, it’s a sign that the breakout was false.

- Look for **candlestick patterns** like **pin bars**, **engulfing patterns**, or **long wicks**. These patterns show that price moved past a key level but was quickly rejected, often due to institutional activity absorbing orders.


How to Identify:

- If the price closes back within the support/resistance range soon after the breakout, it's a fakeout.

- Long upper wicks at resistance (or lower wicks at support) show that price tried to break out but was pushed back by heavy selling (or buying) pressure.



3. Use a Footprint Chart to Spot Absorption

Institutions often **absorb** the liquidity during a fakeout. For example, if a large number of buy orders is placed above a resistance level, institutions may sell into that strength, absorbing the buying pressure and forcing price to reverse. Footprint charts display the number of buy and sell orders executed at each price level, making them invaluable for spotting fakeouts.


How to Identify:

- If the price breaks above a resistance level but the footprint chart shows that a large number of sell orders are being absorbed without significant upward movement, it suggests that institutions are using the breakout to offload positions (fakeout).



4. Use Timeframe Analysis: Confirm Breakouts on Higher Timeframes

Fakeouts often occur on lower timeframes, where price can briefly move past key levels before reversing. To avoid being caught by a fakeout, always confirm breakouts on higher timeframes (e.g., 1-hour, 4-hour, or daily charts). Institutions tend to base their decisions on these larger timeframes, so a true breakout will typically be visible on them.


How to Identify:

- If price breaks out on a lower timeframe (e.g., 5-minute or 15-minute charts) but fails to break out on a higher timeframe (e.g., 1-hour or 4-hour chart), it’s more likely to be a fakeout.

Pro Tip: Always wait for a candle to close on a higher timeframe before entering a trade based on a breakout.



5. Look for Divergence between Price and Indicators

Divergence between price and popular indicators like **Relative Strength Index (RSI) or MACD can signal a potential fakeout. For example, if price breaks above resistance but RSI is showing lower highs, it could mean that momentum is weakening, and the breakout is unsustainable.


How to Identify:

- If price makes a higher high but an oscillator like RSI or MACD shows a lower high, the breakout may lack momentum, signaling a fakeout.

Pro Tip: Use RSI Divergence (price making new highs but RSI failing to follow) to anticipate potential fakeouts at resistance levels.



6. Wait for Retest of Breakout Levels

A classic way to filter fakeouts is to wait for a retest of the breakout level. In a genuine breakout:

- After price breaks out, it often retests the broken level (support or resistance) before continuing in the breakout direction.

- If the price fails the retest and moves back into the range, it confirms the breakout was false.


How to Identify:

- After a breakout, wait to see if the price retests the breakout level. If the price fails to hold this level and quickly moves back inside the range, it's likely a fakeout.

Pro Tip: Be patient—waiting for confirmation of the retest can save you from entering too early and getting caught in a fakeout.



7. Institutional Activity and Stop Hunts

Institutions often **manipulate** the market by pushing price slightly beyond key levels to trigger stop losses, only to reverse the price in the opposite direction. This practice is known as **stop hunting** and is a common cause of fakeouts.


How to Identify:

- Fakeouts caused by stop hunts often have very sharp, rapid moves followed by an immediate reversal. If you see a sudden spike in one direction that quickly reverses, this could indicate stop hunting.

Pro Tip: Avoid placing stop losses at obvious support or resistance levels. Place stops slightly above/below key levels to avoid being trapped by institutional stop hunts.



8. Use Sentiment Analysis

Fakeouts can also be identified by understanding **market sentiment**. If the majority of retail traders are positioned for a breakout, institutions may intentionally push the price in the opposite direction before reversing. Tools like the **Commitment of Traders (COT) report** or **sentiment indicators** can help identify when the majority of traders are positioned in one direction, making a fakeout more likely.


How to Identify:

- If sentiment is heavily skewed toward one direction (e.g., everyone is bullish), there is a higher chance of a fakeout in the opposite direction. Institutions often go against the crowd.



Summary: How to Avoid Getting Caught in Fakeouts

1. Check Volume: Real breakouts have sustained volume. Low or declining volume during a breakout is a red flag.

2. Watch Price Action: Look for price rejections, long wicks, and quick reversals.

3. Use Footprint Charts: Spot institutional absorption during fakeouts.

4. Multi-timeframe Analysis: Confirm breakouts on higher timeframes for reliability.

5. Check for Divergence: Use indicators like RSI or MACD to confirm momentum.

6. Wait for Retests: A successful retest of the breakout level can confirm whether it’s genuine.

7. Be Aware of Stop Hunts: Don’t place stops at obvious levels to avoid being trapped by institutions.

8. Watch Market Sentiment: When most retail traders are positioned one way, a fakeout is more likely.


By mastering these techniques, you’ll be better equipped to identify and avoid fakeouts, keeping your trades aligned with institutional moves instead of being caught by market manipulation.

Subscribe for daily market insights

bottom of page