A fakeout occurs when a trader takes a position anticipating a price movement that ultimately does not happen. This phrase is frequently used in trading and technical analysis (TA). People typically employ it when the price moves in the opposite direction of the trade concept.
Additionally, a fakeout could refer to a “false breakout” or “fake breakout.” The price spikes and breaks out of the technical price structure before abruptly reversing. The worst-case scenario for any breakout trader is when they place a transaction as soon as the price breaks.
In the event of a fakeout, you can suffer a substantial loss. For example, a technical analyst may identify a pattern that matches their strategy, which appears to be succeeding. However, all things considered, the price could suddenly change due to outside influences, resulting in a significant transaction loss.
Due to those circumstances, many traders would opt to prepare their exit strategies and place stop-loss orders in advance. It is a fairly common method for essential risk management.
