Peculiarities of trading in the Fakeout-Shakeout pattern

Trading within a consolidation pattern resembles fishing. You wait till a fish bites, you hook...It sometimes gets away. In trading, this situation is called “false breakout”. Sometimes, it isn’t occasional, it can be organised by a big trader. He/she is very much aware of the plankton’s desire to open a position at the breakout of the trading range. If the market crowd is not as powerful as it seems to be, one can make easy profits by trapping it.  This strategy is put into practice most effectively in the Fakeout-Shakeout pattern. 

The initial condition for pattern forming is consolidation. The longer it lasts, the more chances there are for a currency pair to start trading in a trend. Then, one of the limits of the trading channel is broken out and the pair returns quickly to the initial position. Once the quotes have moved to the middle of the previous range, traders shall search for an opportunity to enter the market. 

For example, in case of AUD/NZD, the trading range had remained active for almost 1 month, then the bears tried to assault the support level. A fiasco followed by the return to the middle of the consolidation range indicated the sellers’weakness. The bulls started looking for a signal to open a long position. And they found it. The breakout of the upper limit of the short-term trading range with a subsequent retest allowed pressing the “BUY” button.  

A protective stop order is normally placed near the lower limit of short- or medium-term consolidation. The use of a floating Take-Profit order allowed reaching an impressive profit/loss ratio. 

The Fakeout-Shakeout pattern on daily chart EUR/USD

The deeper the quotes of the pair move, the more serious the trap is for sellers. A typical example is the current situation concerning EUR/USD. Once the currency pair overcame the limits of the medium-term range of 1.153-1.183, we weren’t short of bearish forecasts. A lot of banks predicted a level of 1.09-1.1, but the reality turned our different. Having allowed the fans of the dollar to enjoy themselves, the bulls took the lead back again. When the quotes reached the middle of the previous trading range, the traders in the Fakeout-Shakeout pattern had to look for an opportunity to form long positions.   The “Double bottom” and AB=CD patterns acted like aids. The former indicated the entry point and the latter - the exit point. A target at 200% may be realized, but first, the bulls need to assault the resistance level at 1.183. 

The Fakeout-Shakeout pattern on daily chart EUR/USD

I’d like to draw traders’ attention to the fact that the quotes’ return to the middle of the trading channel alone doesn’t mean anything. It often serves as an important level near which the quotes start jumping. It’s a peculiar fair value, if to speak in terms of such technical analysis tool as market profile. The main task is to find an entry point near this level, and to do so, the whole toolkit shall be used. Thus, quite a curious situation developed at the turn of the year 2017 for the major currency pair. There were false breakouts in both lower and upper limits of the consolidation range. Its middle became a peculiar support level. At the same time, the reversal patterns “Head and Shoulders” and  “Crab” allowed opening long positions. Traders’ logic was rewarded with a sharp upward movement of EUR/USD

The Fakeout-Shakeout pattern on 4-hour chart EUR/USD

So, false breakouts reveal the weakness of assaulters while the understanding of how they can be exploited can boost the efficiency of trading. 

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Price chart of EURUSD in real time mode

Fakeout-Shakeout: a trap for adversaries

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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