And when I spot a fakeout I feel its my duty to call it out.
First, because I want to learn to spot these bad boys of trend following as they are happening.
And second, because I’ve been caught in so many of these fakeouts I feel it’s my duty to bring them up whenever I see them so that I might help any other traders who have felt their wrath.
2 fakeouts? Not cool, bro…
So How Does A Fakeout Happen?
You know, if you were to ask me this right after a fakeout just happened I would not be able to tell you how it happened.
That’s because sometimes you can get caught up in the moment — and even though your resolve is to hold through corrections, some corrections look and feel like they’re never going to stop correcting.
But that bit of theory aside, the fakeout is really quite simple. Price moves past resistance and looks to be breaking out to the upside (or breaking down to the downside) — but instead of continuing in the same direction, price reverses sharply and takes off in the opposite direction.
For a second it can feel like the bottom is dropping out of the trade.
But once short term panic selling subsides, price reverses and shoots higher — usually without you.
So What Can You Do About Fakeouts?
Nothing really. If you’re a tried and true trend follower who buys breakouts then fakeouts are part of the game. And as famous trend following trader Ed Seykota once said — if you want to avoid whipsaws (another term for fakeouts) stop trading.
But for those of us who want to try and get creative (me), there might be a way to scan for these puppies and get some great trades out of them. What that scan might be and where these stocks might be hiding is fodder for another post on another day.