www.fxjake.

com Real Trades, Real Trading Advice

How to Trade
Breakouts
and Fakeouts

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

Some fakes are easier to spot than others.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

One of the best risk to reward trading setups is the breakout trade. Many
traders are aware of the fact that after price settles into a “consolidation box,”
price will often breakout of the box with a violent and extended move. This
does not mean, of course, that price will always make a violent and extended
move after some time in the consolidation box. Traders who have attempted
to jump on this type of breakout will attest to the fact that at times price will
breakout of the consolidation box, and at other times an apparent breakout
will turn into a “fakeout.”

In fact, fakeouts have become so common, some traders use the fakeout
trading setup to make money. I will show you one way for you to trade this
fakeout.

Many traders can identify a consolidation box, like the one depicted in this
chart:

Price has been stuck between this support zone down low and the resistance
zone above.

Obviously, these consolidation boxes are great because when price does
eventually make it outside of the consolidation box it will often move very
swiftly and far.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

There is a possible breakout at the green arrow on this chart.

For many traders, these breakouts can be ideal trading setups because of the
minimal risk. A stoploss can be placed inside the consolidation box and often
the breakout will go quite far, offering a very favorable reward to risk ratio.

The problem for traders, though, is that often these breakouts prove to be
“fakeouts” - that is, many of these initial moves outside of the consolidation
box fizzle out and price re-enters the box. Traders can be wary of jumping on
the breakout because of the potential for a fakeout. How is it possible for
traders to possibly determine a breakout from a fakeout?

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

In this case, the breakout was, in fact, a fakeout. Price fell back inside the
consolidation box.

The answer may simply be to exercise a little patience. Many traders are
aware of the fact that once support is broken it will often serve as resistance,
and once resistance is broken it often becomes support. What this means for
the breakout is that many times, after a true breakout, price will come back to
touch the edge of the consolidation box before travelling further in the
direction of the breakout.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

After trading within the consolidation box, a breakout to the upside…is it a

fakeout?

In the chart above, it is clear that price has been trading in a tight range,
between the support and resistance zones. A potential breakout appears
when price jumps over the resistance line. Traders will have to determine
whether this is a true breakout, or merely a fakeout. However, waiting for the
next bar to print will give a clue to traders who are watching the market.

The next bar touches the previous resistance zone, finds support and jumps
upward. This is a great high probability trade setup. Traders can jump in here
and buy the market because price has not only pushed through resistance, but
found support at this important zone. Traders who have been patiently
watching the market now know that the probabilities are in favor of a
breakout, as a fakeout would have seen price come back and close inside the
consolidation box.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

Waiting for the breakout to touch the consolidation box may help increase the
odds of jumping on a valid breakout.

Traders who take advantage of the fact that resistance often becomes support
after a breakout (and the opposite for downside breakouts, where support
often becomes resistance) are likely to find high probability trade setups.
Simply waiting for the initial breakout move to unfold may help traders avoid
trading the fakeouts, which eventually settle back inside the consolidation
box. Try this out for yourself, backtest a few hundred trades and see whether
you would have avoided many of the fakeouts and found more true
breakouts, which often show their true colors by sharply bouncing off of the
consolidation box after the breakout.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
www.fxjake.com Real Trades, Real Trading Advice

www.fxjake.com

Trading for a living is fun, but it can also be a bit lonely. I love to hear from
other traders. I know that I can help you to become a better trader if that is
something you really want. I can give you a lot of free help, but if you are
really looking forward to trading for a living, my Personal Trading program
may be best for you, but you must be willing to work at it. If you have any
trading questions or questions about trading breakouts (or fakeouts), please
email me:
Walt@fxjake.com

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to
invest in foreign exchange you should carefully consider your investment objectives, level of
experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your
initial investment and therefore you should not invest money that you cannot afford to lose. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.