Chapter 20, Part III. Trading Fakeouts. Page 4

Commander in Pips: Ok. Here’s an easy example:

Public (retail traders) mentality:

They treat any support and resistance levels as some kind of high and low or, as a ceiling and floor, if you want. They expect that if any breakout will happen – then further price action will continue in the direction of the breakout. If support level will break, then most traders will intend to sell, while if resistance is broken – most traders will start to open long positions. For the crowd the greed mentality is very common. The public believe in trading in a row with breakout. But not only in trading – they want a huge move, they want big money and big profit.

What comes next…

You may ask and what is the problem with it? Is it bad to hope for huge move? Nope. But switch on your brains – there is a big whale on the other side of your wire and he has to make his money, and shareholders will fire him at the end of the financial year if he loses. That is the imperfection of our world. As Metallica sings – “Sad but true”.


Imagine? Great. So, what will we have due to this imperfection? The truth is that most breakouts fail, just because the smart big guys have to make their money. They give you liquidity and it’s not really free of charge. Since you use it – you have to pay for it and the smart minority want to make money using the naïve majority. I think you understand me already…

Pipruit: Not quite…
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Commander in Pips: Ok let’s go further. When he public anticipate breakout or start to prepare for it they want to buy above resistance (or to sell below support) and crowd is huge. Since whole crowd wants to buy, who will have to sell to fill their orders? The market maker will, since this is his duty – to provide liquidity. But he is not a fool. Where does the crowd usually place stops? Just below a resistance level. The market maker sees that.

…and finally

He fills all public buy orders by taking the other side of trades and selling them his position, then he adds a few more shorts to pressure the market down until the public’s stop buy orders and closes his shorts with those orders – Bingo! – we’ve got fake out! Of course, market makers don’t do that blindly. There are sharp calculations that depend on market depth, since if the market maker will open too many shorts when he pushes the market in the direction of public’s stops, he takes the risk not to be able close all of them in profit. Second, market makers see the larger picture. If market sentiment has changed, then a true breakout is possible and the market maker just fills public orders with hedging them. But in most cases, the public trades breakouts, while the smart minority – fade breakouts, i.e. trade fakeouts.

Pipruit: Very interesting and useful information. Thanks. But how we can be sure that this will be breakout or fake out?​

Commander in Pips: Well there could not be a 100% guaranty, but still we can follow some steps in different scenarios that could help us. First, remember what we’ve said previously about breakouts of support/resistance levels, trend lines, Fib levels etc. and about wash & rinse patterns.

Pipruit: Ok. I hope I’ll able to do that:​