| This is a common occurrence in trading ranges: prices will trade
sideways for a period of time, attempting to break out of the sideways
range. In the example below, you can see that prices attempted several
times to break out of both the upper and the lower end of the range.
When prices finally make a significant break in one direction, it is not
uncommon at all for the price break to fail, and for prices to fall not only
back into the range, but straight on through. In this example, the
size of the failure was exactly double the size of the original break. This is not really a "fakeout"; there is no dastardly person or people out there orchestrating this. It's simply a common pattern when the market tries to go up, and sellers buyers disappear. The initial break is often supported by a group of traders who "jump in" to catch the ride; when those buyers dry up then there can be a collapse. The best way to trade out of a range is to go long at the bottom of the range, with a tight stop, and exit half at the top of the range. That way if prices reverse back down, you will at least have scalped a small portion to cover your costs and perhaps make a small profit. If you try to "jump in" each time a break is attempted, you will get in much too late and will likely get stopped out on a reversal. In the example below, there were three clear break attempts to the upside before the fourth one finally succeeded - and even that, for a short term only. |
