In the crypto market which is known for its high volatility, price movements often create scenarios that are difficult to predict. Crypto traders often experience confusion between fake outs and break outs, two conditions that are similar but have different impacts. Understanding the differences and characteristics of the two can help traders avoid the trap of false signals (fake outs) and be more confident when valid price movements (break outs) occur.
This article will discuss in depth about fake outs and break outs in crypto trading, including definitions, how to detect them, causes, supporting indicators, and practical tips for identifying and managing risks in dealing with both.
1. What is Break Out?
Breakout is a condition when the price of an asset moves through a significant support or resistance level. In the world of trading, a breakout can indicate a major trend change or a continuation of an ongoing trend. Typically, traders consider a breakout as a strong signal to open a new position or add to an existing position.
Break outs can be divided into two main types:
- Bullish Breakout: Occurs when the price breaks through resistance, indicating the possibility that the price will continue to rise. Bullish breakouts are often a positive signal that gives traders the opportunity to buy an asset.
- Bearish Breakout: Occurs when price breaks through support, indicating that price is likely to continue falling. Bearish breakouts are often followed by a strong downtrend, giving traders a signal to sell or go short.
2. What is Fake Out?
Fake out is a condition where the price moves past the support or resistance level, but then quickly reverses direction, indicating that the price movement is a false signal. Fake out can occur in all time frames and can cause losses for traders who are trapped by this false breakout signal.
Causes of fake outs include:
- Lack of Supporting Volume: Breakouts that occur without a large trading volume are usually more prone to reversing direction and becoming fake outs.
- Market Manipulation Actions by “Whales”: Big players in the market often take advantage of fake outs to manipulate price movements to their advantage.
- High Volatility: In the volatile crypto market, rapid price movements up and down in the short term can create fake outs.
3. Characteristics of Break Out and Fake Out
A Valid Break Out has the following characteristics:
- High Volume: A valid breakout is usually supported by high trading volume, indicating that many traders agree with the new price direction.
- Price Sustainability: Once the price breaks through a resistance or support level, the price will remain outside that level for some time, indicating the validity of the breakout.
- Consistent Market Sentiment: Valid breakouts are often supported by positive (for bullish breakouts) or negative (for bearish breakouts) news or market sentiment.
Fake Out has the following characteristics:
- Low Volume: Fake outs are often not supported by large trading volumes, because only a few traders support the movement.
- Price Returns to Initial Level: After the price breaks through support or resistance, the price quickly reverses and returns to the initial level, indicating that the price movement is not strong enough.
- High Volatility in the Short Term: Fake outs often occur when volatility is high, and prices usually move up and down rapidly without a clear direction.
4. Indicators to Differentiate Break Out and Fake Out
Using technical indicators can help traders distinguish valid breakouts from fake outs. Here are some effective indicators:
- Trading Volume: Volume is a very useful leading indicator. A valid breakout is usually supported by a significant increase in volume. If the price breaks through resistance or support without any spike in volume, this could be a sign of a fakeout.
- Moving Average (MA): MA, especially MA with long periods such as MA 50 and MA 200, can be a confirmation of the trend direction. If the breakout occurs above or below the main MA, then the movement is more likely to be valid.
- Relative Strength Index (RSI): RSI can help identify overbought or oversold conditions. When price breaks out but RSI shows overbought conditions at the resistance level or oversold at the support level, there is a possibility that the movement is just a fake out.
- Bollinger Bands: Bollinger Bands measure price volatility. When price breaks through the upper or lower band, it can indicate a potential breakout, but if price returns back into the band quickly, it can be a fake out.
5. Strategy for Dealing with Fake Outs and Break Outs in Crypto Trading
Here are some strategies that can help traders manage risk and improve decision accuracy when dealing with fake outs and break outs.
A. Confirm Break Out with Volume
Volume is key to distinguishing a valid breakout from a fake out. Before entering based on a breakout signal, be sure to see if there is a significant spike in volume. High volume indicates that many traders are supporting the new direction.
B. Use Higher Time Frame
Fake outs are more common on lower time frames (such as 5 minutes or 15 minutes). To make sure that the breakout is truly valid, consider analyzing price action on higher time frames, such as 1 hour or 4 hours. Higher time frames tend to be more stable and can show clearer trends.
C. Use Stop Loss Wisely
Stop loss is very important to reduce the risk of fake out. Place the stop loss at a reasonable level based on support and resistance analysis, or slightly below the entry level for buy positions and slightly above the entry level for sell positions.
D. Wait for Pullback for Confirmation
One way to avoid fake outs is to wait for a pullback or price correction after a breakout. After the price breaks through the resistance or support level, wait for the price to test the level again. If the price does not break through again, this could be a signal that the breakout is valid.
E. Pay Attention to News and Market Sentiment
The crypto market is heavily influenced by global news and sentiment. News such as the launch of a new project, government regulation, or crypto-related decisions from major companies can be the catalyst that triggers a breakout. Traders who follow the news can recognize a valid breakout faster than a fake out.
6. Examples of Strategy Implementation in the Crypto Market
Let’s say you’re watching a major resistance level in Bitcoin at $30,000. Here’s how to implement a strategy to avoid fake outs:
1. Check Volume: As the price approaches $30,000, pay attention to volume. If volume increases, the probability of a breakout is higher. However, if volume is low, be prepared for a possible fakeout.
2. Use RSI: Check the overbought condition on RSI. If the price breaks through $30,000 but RSI is already at the overbought level, this could be a sign that the price movement has the potential to return to the bottom.
3. Wait for Pullback: If the price breaks $30,000, wait for the price to retest this level. If the price stays above $30,000 after the pullback, the breakout is most likely valid.
Conclusion
Breakouts and fakeouts are common occurrences in the crypto market and have a major impact on trading decisions. Differentiating between the two requires careful technical analysis, an understanding of volume, indicators, and the use of the right time frame.
By implementing strategies such as volume confirmation, use of technical indicators, stop loss, and monitoring market news, traders can reduce the risk of fake outs and be more confident in breakout signals. The combination of technical knowledge with careful risk management will help traders make wiser decisions in the dynamic crypto market.
