Is it a Fakeout or a Breakout? 3 Suggestions for Avoiding Fakeouts and Price Spikes
When you start testing or trading binary options, one of the most irritating and frequent occurrences you are bound to notice are fakeouts.
Fakeouts are a plague for traders everywhere, so rest assured you are not the only one who has to deal with them. What is a fakeout? It’s a fake breakout. Price looks like it is trying to head somewhere, and believing you have spotted a breakout pattern, you enter into a binary options trade. The moment that you do, price turns around and plunges back the opposite way, and suddenly you have lost money. The next time you think you spot a breakout, maybe you sit on your hands instead of pulling the trigger. Only that time, price goes exactly where you thought it would. And this time you missed an opportunity.
This cycle can be extremely frustrating, if not downright devastating to a trader’s confidence. Pretty soon after experiencing this a few times, you may not know when to pull the trigger at all. You may start trading randomly, or you may stop trading altogether. Other traders have to deal with fakeouts too though. So how do they spot them and learn to tell the difference?
Determine what may be preventing you from Pulling the Trigger here
There are a number of different strategies you can use to avoid being faked out by the market. Some of them involve learning to identify a fakeout from a breakout on sight. Others involve waiting for confluence or indicators to align. Sometimes the problem may simply be that you are trading in a choppy market. Then there is the idea of using retracements to ensure that price is going the direction you want it to. I am going to break down some of these ideas for you below. These suggestions will hopefully get you going on the right path.
1.What type of market are you trading in?
This suggestion involves looking at context. There are certain market conditions which are conducive to trading and others which are hazardous—much like sea conditions. Smooth sailing is possible when waters are calm, but during choppy, hazardous seas, setting sail will only result in disaster. Choppy markets, like choppy seas, tend to capsize traders.
When you look at your chart, do you see a lot of whipsaws and random price spikes? Is the market behaving unpredictably? Or is it nice and tranquil and calm, with little directional price movements inside a ranging channel? In the latter situation, you might catch a trend breakout or profit from small, predictable price movements. In a choppy, unpredictable market, you will lose money. Wait for conditions to clear, or trade a different asset displaying friendlier behavior. Check out how to set up your own trading charts
2.Wait for confluence.
Do you know what confluence is? When several different indicators on your chart align to tell you something, that is called confluence. The word originally referred to the merging of two rivers. As an example, when a couple of moving averages on your chart merge together and price bounces off of them, that is a type of confluence. The two moving averages are acting as stronger resistance than either one alone would. You could trust an upward price movement far more in this situation than you could if you only had one moving average acting as support. You do not have to rely on confluence, but it is a great tool for your trading toolbox, and if you are struggling, it can help you identify the best trade contexts. Learn how to use confluence in binary options trading
3.Learn how to use retracement patterns.
When price moves in a certain direction, returns in the previous direction, then turns around and proceeds on its way in the original direction, that is called a retracement. Little retracements happen all the time in the market, even in strong trending conditions. So, for example, say that oil breaks out above a support line. You might be thinking of entering a Call trade at this point. Oil then turns around, reversing direction, and goes back down. It hits the support line, then reverses once again, and goes back up. This time it goes a lot higher before it hesitates, reverses again, touches a higher line of support, and then goes back up.
Now imagine you had entered into a Call trade on oil right when you spotted that original breakout. What expiry time would you have set? Maybe you would have chosen a relatively short time to be in your trade. When price reversed, heading back down, you might have lost money. Even though price goes up again after the retracement, what if your trade expired before it went on to be profitable? Even though you were correct about the trend direction and the breakout, you still would have lost money. Why? Because you did not wait for the retracement.
In many cases, price does not recover. After turning around, oil could have continued heading down, and might not have gone back up for some time. In that situation, had you entered on a signal you thought represented a breakout, you would actually have been faked out by a brief price spike. While forming, it would have looked like a breakout signal, but afterward, it would have been quite clear that you were wrong.
Waiting for the retracement prevents timing issues and also reduces the likelihood that you will lose money due to a price spike. If price retraces and then respects the existing level of support (or resistance), returning to the movement that you believed was happening, that line of support becomes even stronger. This contributes to the positive context for your trade.
Test Until You Get It
Avoiding price spikes and fakeouts is not the most intuitive process in the world, and it is something that numerous traders struggle with, so try not to feel bad if it gives you trouble. Do try to avoid losing money because you don’t yet know what you are doing. There are brokers who will allow you to demo test indefinitely. Why lose money trading poorly when you can wait to trade until you actually have a chance to be profitable and successful? In the meantime, this article has more detailed information on these topics. You also may be interested in learning more about another technique for trading using retracements. Click here to learn about Fibonacci retracement levels.
Brush up on other binary options trading information by checking out the following: