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The Fake-Out

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1The Fake-Out Empty The Fake-Out Sun Jun 14, 2015 12:04 am


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The fake-out is the breakout trader’s nemesis. This is the biggest problem with most breakout trading strategies. Many breakout signals offer excellent trading opportunities, but others are triggered by fake-outs. A fake-out is a move outside of the consolidation zone that appears to be a breakout,but instead of continuing on in one direction a strong trend, the market retraces back inside of the consolidation zone. The fake-out always ends up with the market eventually falling back inside the zone defined by both the support and the resistance levels (back inside the box). The USD/CHF four-hour chart in Figure 5.7 is an example of a fake-out.

FIGURE 5.7 This fake-out is marked with the arrow on the USD/CHF four-hour chart. The market trades higher than the top of the box, but later quickly falls back inside of the box. For most standard breakout systems this would be a losing trade.
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The strong move outside the box (see arrow) is assumed to be a breakout, but the market retraces and eventually falls back inside the box.Thus, a fake-out is a breakout trade that is triggered by a convincing candlestick that extends beyond a support or resistance zone. This action is followed by the market moving back inside the consolidation box (see Figure 5.8).

FIGURE 5.8 Another fake-out, this time on the AUD/USD daily chart. The market trades beyond the bottom of the box, triggering a sell trade, but then the market quickly jumps back up inside the consolidation box. This would be a failed breakout trade for most breakout trading systems.

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Once the market retreats back into the consolidation box after a fake-out, price will often languish inside the box for some time.The fake-out is actually quite common, and a quick look at the charts will show how often they do occur.These failed breakouts, the fake-outs, are the primary reason traders find it difficult to consistently apply breakout trading systems. Breakout systems are simply wrong too often. Breakout systems may occasionally grab a great trend early, but fake-outs signal many losing trades.

Why is this the case? Why are fake-outs so common?Ask any trading guru the question “how often does the market trend?” and, depending on the guru, you will be told that themarket trends about 15 to 30 percent of the time.

This is precisely why conventional breakout systems often fail. Most of the time, the markets are not ready to start trending; they spend the majority of the time drifting without direction. This is why breakout trades often fail. Would it be nice if you could tell when a breakout is going to continue onward beyond the consolidation box?

What if there was a way to avoid the dreaded fake-out? Would you like a trading system for identifying the breakouts most likely to continue onward in the direction of the trend? There is such a system, and it is called the last-kiss trade. The last kiss is a specific type of breakout that suggests a breakout will develop into a strong trending move.

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