How to Identify Fake Breakout in Intraday Trading: 6 Cool Tips to Avoid False Breakouts

A fake breakout or fakeout is a quick movement in stock or index charts that may mimic a real breakout. Most beginner traders fail to identify it and punch a trade just to see a quick reversal of the market in a matter of time, ending up in a loss and hitting the stop loss.

Even if you are an experienced trader, it is not easy to foresee a fake breakout while you are waiting to enter an intraday trade. Yes, as an intraday trader, you might wish to identify a fake breakout as quickly as possible so as not to make a loss.

In this article on how to identify a fake breakout in Nifty, Bank Nifty, or other indices or stock charts, I would like to bring your attention to six cool tips to identify fake breakouts.

If you can take a confirmation of any of half of the below steps, you can surely come out as a winner on that day.

1. Abrupt Early Morning Moves

It is the very nature of the market to make quick and abrupt moves, either upside or downside, in the early minutes of opening.

Those moves may possibly have no relation to the overall trend of that day, so there is a good chance to have a fake breakout.

Quick moves in the early minutes of the market opening might usually be influenced by the overnight buying and selling orders of the stocks by big players like FIIs and DIIs.

Anyway, as an intraday trader, you should doubt those moves as pure fakeouts.

So stay away from trading in the first few minutes, provided that you have clear foresight about the reasons for those moves on a particular day.

Note: Check out the chart below to see when the Nifty 50 made a fake uptrend move of over 50 points in the early 45 minutes of market opening before a massive and prolonged fall on the trading day of July 7, 2023.

2. Small Candle Movements

The quick and rapid moves of the candle are indeed the best ways to identify real breakouts. That said, the breakout candles should be larger and more powerful.

A breakout-like move with small candles might be put under the shadow of a doubt before venturing into a trade because these candles have less momentum.

In such scenarios, the call buyers who incautiously entered the market at the top band of the consolidation range may tend to instantly close their positions.

Concurrently, professional short sellers will try to enter their trade since they can foresee a fall.

So the fresh entries will get trapped in a fakeout.

3. Quick Momentum Breakout

This scenario is just the opposite of the above one.

You should be quite cautious about the fast, quick, and parabolic movement of the candles beyond a resistance level. This is as dangerous as a small candle breakout attempt.

Yes, a healthy breakout doesn’t happen in a hurry.

It will take time for the chart to test a resistance level multiple times. As per market experts, at least three attempts must be made before a real breakout or breakdown.

If I take the example of breaking a glass door in an emergency, you won’t try to hit it with a stone from a long distance to get extra momentum or pressure.

The best way you would go for it could be to hit the glass door with a strong object or stone multiple times from a nearby position to get it broken in a simple and safe way.

That is the same case in the stock market. A quick movement from the support or any other key level to a resistance line may most likely end up in a fakeout, so take better care.

4. Key Level Freshness

This scenario is actually another side of the above scenario.

The key point is that the freshness of a breakout or breakdown from a key level is a matter of concern in your effort to clearly identify how a fake breakout happens.

Any quick up or down move without enough testing of the key levels or a consolidation around that range may most likely turn out to be a fakeout.

Well, as an intraday trader, you might be aware of various important key levels on the chart.

Most likely, we can expect a breakout or breakdown from a key level, which is quite natural because that is how the market works.

For your information, some of the key levels are the day opening range, the day high, the day low, the previous day, the swing high, the swing low, and more.

By the way, in my personal view, the opening range has a lot of importance in the movement of that particular day’s market, though many people don’t find it very important.

Have a backtest on your chart to see how the market evolves around the opening range.

Note: See the Larsen and Toubro chart below for a real-world example of a key-level fakeout. The market attempts to break out on the very second attempt to test a key level but fails. Later, after multiple attempts, the market falls sharply.

This is also an example of the next point: volume strength.

Have a look at the strength of volume candles when the market falls. It has increased exponentially compared to the volume at the early tests of the key level.

5. Volume Strength

This is a simple scenario to understand, I think.

You can just have a look at the volume candles when the market attempts a breakout or breakdown. That can clearly tell you whether it is a fake or real move.

6. Candle Closure

This looks to be more of a precautionary or supportive step to take.

Someone can’t say that a proper candle closure indicates a real breakout because it largely depends on the candle timeframe that you are using while trading.

It will be too late to wait for a 15-minute candle to close to identify whether a move is fake or not, and it will be too early to identify a good move with a 3-minute candle closure.

A 5-minute candle closure can perhaps be counted as a nearly ideal way to realize it, but it is always better to use this factor as a proactive step to watch the market’s moves.

If you get a 5-minute candle closed along with multiple other confirmations, you can go ahead and punch your trade, I think.

What is a False Breakout in Trading and Why is it Called So?

A false or fake breakout is the market’s move beyond (by breaking) a resistance or support level as it hurries up to go ahead into the next level but reverts quickly to either the consolidation range or even the opposite direction. The trouble with the fake breakout is that a beginner trader may find it hard to identify the false move and punch a trade in the hope the market goes upside or downside. Technically speaking, this move can be called a failed attempt by the market to go up or down, but in the traders’ communities, it is often assumed as the big players’ gameplay to hunt the stop losses of retail traders. That is why it is called a fake or false breakout.

Disclaimer: This article is inspired by a video on fake breakouts by Uvais Panakkadan on his YouTube channel, Art of Option Trading.

Mr. Uvais is a known trader and stock market trainer from Cochin, Kerala. 

The Main Image by Gerd Altmann from Pixabay