Breakouts vs Fakeouts: How to Tell the Difference

Trading Blog
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Originally published at: https://optimusfutures.com/tradeblog/archives/breakouts-vs-fakeouts/

This article on Breakouts vs Fakeouts is the opinion of Optimus Futures. Most traders have experienced that moment in their trading career where an exciting breakout situation horribly turned against, getting hit by a “fakeout” that was cleverly disguised as a breakout scenario. New and intermediate traders often struggle to differentiate between breakout and fakeout scenarios because often these setups can have similar building blocks in terms of price consolidating, or otherwise moving towards a breakout point. Except that on some occasions it appears to play out as per the textbook and other times, reverses and moves in the other…

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Interesting article.

Thanks!

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Good stuff! Very helpful.

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Hi Matt,

Great article - what are your opinion of fakeout/breakouts like in relation to timeframes?

higher time frames are clearly more reliable for both breakout/fakeout trading. However what is your opinion on trading these set ups on the shorter (1 min, 5 min) timeframes on the e mini’s?

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In my opinion, there is more “jitter” in short term trading than long term, but I can not say that longer term time frames are more reliable. This is because I just don’t know it to be the case, and I am sure some would argue to the contrary.

However, I would give you just a few guidelines that may help you:

  1. Each commodity/Futures may I have its own break-out levels that would justify an entry. For example, GC may need a break out $1 or $3 from a channel while ES may need 1 point.
  2. You should track volatility to determine the breakouts. For example, use ATR for Oil volatility while VIX for the ES. This could help you set realistic levels of risk management and profit taking.

Again, these are just some example where you have to be flexible and always adaptable to changing market conditions.

Matt Z
Optimus Futures

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