Price consolidation boxes are delineated by resistance and support levels. In addition, we are aware that there is a strong tendency for price to propel itself through one of these trendlines only to retract shortly afterwards. This whipsaw action causes many smaller traders to get stopped-out and is the reason why it is important to be able to distinguish breakouts from fakeouts.

Taking all this into account, you can exploit fakeouts by trading in the opposite direction to the general herd movement. This idea can be used irrespective of whether price is trading a sloping or horizontal channel.

First, you need to locate the resistance, support and pivot levels of the consolidation box, under consideration, and then monitor it using either an hourly or 4 hour trading chart. For example, to determine a fakeout during a bull breakout, watch closely for the price to first penetrate the resistance level but then to retract and close beneath that level by using one of the stated timing charts. Enter a short position at that point.

If, however, price does drop lower very quickly, wait for a retracement higher before activating your short trade. Under these conditions, then place your stop above the highest level of the fakeout. In addition, attempt to define a target level using your risk:reward strategy, if possible.

However, the biggest problem concerning this type of trading is that you are, in effect, trading against the trend. You can, however, provide yourself some protection against such adverse conditions by adopting a good money management strategy.

Are there any opportunities whereby you could trade fakeouts in the direction of the trend, you may ask? Yes, there are. For example, here is one. Assume that price has been trading in an upwards bull channel for some time. The bottom limit of the channel is defined by a support level.

Under these conditions, price can often surge down and pierce the support level in the process. However, it then frequently springs back above its old support level, now resistance, forming a new fakeout in the process. Quite often, price will then advance in the direction of its old trend for some considerable distance.

If you can detect such a sequence using either the hourly or four hour trading charts, then you need to activate a new long trade about 20 pips above the old support level. Again, set your stop just at a point lower than the fakeout and target your profits in relation to your risk:reward strategy.