Breakout/Fakeout Strategy: Telling Real Breakouts from False Ones

In this article, we’ll look at a basic breakout/fakeout strategy.

From S/R, Patterns, and Failure Patterns we’ll assume you already know:

• how to mark support and resistance levels,
• how ranges, triangles, and wedges compress price,
• and how failed moves can create traps.

Here, we’ll build on that and treat moves beyond a level as either:

a real breakout that can lead into trend-following trades,
or a fakeout that fails and snaps back,
offering mean-reversion or trap trades.

Our goal is not to make things complicated,
but to give you a simple, usable structure.

The diagram below shows:

• on the left: a range high resistance that is broken cleanly,
  then retested as support as the trend continues higher,
• on the right: price wicks slightly above resistance,
  then falls back inside the range and sells off – a classic fakeout.

Tap to zoom

The key idea:

• breakouts belong more to Trend Following,
• fakeouts are closer to Mean Reversion
  and Failure Patterns.

1. Breakouts vs Fakeouts: simple definitions

Let’s keep the wording simple:

• Breakout
  → price clearly breaks a range, pattern, or S/R level
  and then continues in that direction.

• Fakeout (failed breakout)
  → price briefly moves beyond the level,
  then returns back inside and often moves hard the other way.

On the chart, both can look like a breakout at first.
The difference is:

• what price does after the initial push,
• whether it can hold outside the level or not.

In this strategy we will:

1. treat breakouts as trend-following setups,
2. treat fakeouts as mean-reversion / trap setups.

2. What a “good” breakout environment looks like

We’ll start with breakout trades.
Good breakouts usually share a few traits:

1. There is a clear range or pattern first

   • a visible range with a clear top and bottom
     from S/R,
   • or a tightening pattern like triangles or wedges
     from Triangles and Wedges.

2. The level has been tested several times

   • the same resistance/support has been hit multiple times,
   • energy is built up at that level.

3. The breakout candle is “clean”

   • in Candle Patterns terms:
     a candle with a clear body in the breakout direction,
   • not just a long wick poking through,
   • ideally closing outside the level, not back inside.

4. Price does not instantly snap back

   • after the break, price spends some time outside the level,
   • it doesn’t immediately return and close back in the range.

Put differently:
random lines + tiny poke + instant rejection
is usually not the environment for solid breakout trades.

3. Breakout trend-following example (long)

Let’s take an upside breakout as an example.

3-1. Setting the context

1. Higher timeframe direction

   • using MA 60 Strategy,
     check if the daily bias is up,
   • if the higher timeframe is bullish,
     upside breakouts tend to be more natural.

2. Finding the key level

   • from S/R,
     identify a clear range high or resistance
     where price has been rejected multiple times.

3. Checking compression

   • near that resistance,
     highs and lows get closer together (squeeze),
   • using ATR,
     look for volatility that is not already extreme.

3-2. Entry, stop, and targets

1. Entry (basic approach)

   • consider entering long when a 4H candle
     closes clearly above the resistance,
   • or after a retest where the old resistance
     starts acting as support.

2. Stop-loss

   • idea: put the stop where the breakout
     would look clearly failed.
   • for example:
     • below the broken resistance, plus
       1.0–1.5 ATR as a buffer
       using ATR.

3. Targets

   • first target: project the height of the range
     above the breakout level,
   • second target: the next resistance
     from S/R,
   • check that the setup offers at least
     around 1:2 R/R using
     Risk Reward.

4. Fakeout example: using failed breakouts as traps

Now let’s look at fakeouts.
We’ll use the case of an upside fakeout → short.

4-1. What to look for

A typical fakeout short candidate has:

1. A clear range high

   • from S/R,
     a range top where price has often been rejected.

2. A small break above + long upper wick

   • price briefly moves above resistance,
   • the breakout candle has a long upper wick
     and a weaker close.

3. Fast move back inside the range

   • in the next candles, the body of the candle
     closes back inside the range.

4. Who is trapped?

   • traders who bought the breakout
     are now caught on the wrong side,
   • as in Failure Patterns,
     this “trap” can unwind hard in the opposite direction.

4-2. Basic structure (short)

1. Entry

   • when price has spiked above resistance and then
     closes back below the level,
   • or after price has fully returned into the range and a small bounce
     shows a bearish candle at the same area.

2. Stop-loss

   • above the fakeout high,
   • plus 1.0–1.5 ATR as a buffer using ATR.

3. Targets

   • first target: mid-range or range low,
   • second target: the next support
     from S/R,
   • again, confirm that the R/R fits your rules in
     Risk Reward.

Note:
fakeout trades often come with faster moves and sharper swings,
so trading them with smaller size or stricter rules
is usually more comfortable.

5. Common mistakes with breakout/fakeout trading

5-1. Treating every line touch as a breakout

• If you buy or sell every tiny move beyond a line,
• you will quickly get chopped up
  by noise around the level.

Always combine:

• the importance of the level (higher timeframe S/R),
• the prior range/pattern structure,
• and the quality of the breakout candle
  (body, close, wicks).

5-2. Chasing breakouts that have already run far

• If you enter long after a huge breakout candle
  far away from the level,
• your stop becomes very wide
  and your R/R gets worse.

Whenever possible:

• look for retests after the breakout,
• and let price show that the level
  has flipped to support/resistance.

5-3. Seeing fakeouts everywhere

• If you call every small failure a fakeout
  and always fade the move,
• you may end up trading counter-trend
  in strong trending markets.

Make a habit of checking:

• is this more like a trend environment
  (Trend Following)?
• or more like a range environment
  (Mean Reversion, ATR low)?

6. Breakout/Fakeout checklist

When you see a breakout or fakeout forming,
a quick checklist can help:

1. “Is this level an important S/R on higher timeframes?”
   (S/R)

2. “Is the recent environment more trend-like
   or more range-like?”
   (Trend Following vs Mean Reversion)

3. “Is the breakout candle clean in terms of body and close,
   or is it mostly a wick?”

4. “If this is a breakout,
   how far can price pull back
   before I call it failed?”
   (where is my invalidation / stop using ATR?)

5. “Does this trade offer acceptable R/R
   under Risk Reward?”

You can think of the breakout/fakeout strategy as:

a basic framework for trading around key levels:
deciding whether a move is a real breakout or a failed one,
and then structuring stops and targets accordingly.

Used together with:

• S/R,
• Patterns and Failure Patterns,
• Trend Following, Mean Reversion,
• and Risk Management,

it can help you calmly answer:

• “Is this a decision zone?”
• “Which scenario (breakout or fakeout) is more likely here?”
• “Does the trade make sense from an R/R perspective?”

without making the chart or the rules overly complicated.