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However, what can definitely be said is that fakeouts occur so frequently that some traders have even designed strategies in order to profit from them. However, should you attempt to utilize such a technique, you must understand that, in many cases, you will be trading against the price trend.
As this is, of course, always a dangerous practice, you need to learn methods so you can trade fakeouts at minimum risk. The following technique will help you identify fakeouts as well as introducing you to some of their main features.
Normally, price moves quite extensively in one direction before it settles into a consolidation box. As such, you must first identify such patterns on any of the trading charts of your currency pairs of interest.
This action can be readily done because the box has a trendline denoted by its resistance and another by its support. In addition, the distance between these two limits is usually relatively small. Consolation boxes can create distinctive patterns.
One such pattern is the flag which consists of two trendlines in parallel that usually point in the opposite direction to the original price movement prior to its creation. The second is the pennant that is formed by its trendlines converging to a point. This pattern, unlike the flag, is normally horizontal.
Many traders are aware, that because price is so restricted whilst it resides inside a consolidation box, it must generate extensive energy in order to force a breakout. As such, you next need to wait until price finally manages to penetrate one of the trendlines.
When such an event happens, many traders attempt to exploit this new situation by activating a breakout trade immediately. They are tempted to do this because they think that the rewards, in such cases, are very good with minimum risk.
However, you are well-advised not to copy this action. Instead, you should adopt patience and allow yourself time to determine if the breakout is real or whether it will revert into a fakeout. During this period, you can detect a fakeout by noticing if the initial move fizzles out and then price re-enters the original consolidation box.
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