A false breakout (also called a fakeout) happens when price appears to break through a clear support, resistance, trendline or pattern, only to reverse and move back into the prior range. For traders who enter on the first push, a false breakout can feel like a trap: stops are triggered, momentum evaporates, and the move reverses. Understanding why false breakouts happen and how to recognise them can help you avoid common mistakes or even trade the failure deliberately. Remember: trading carries risk and this is educational information, not personalised advice.
Why false breakouts occur
False breakouts are a natural consequence of how markets find liquidity and of differing trader behaviour. On a simple level, many retail stop-loss orders and breakout entries cluster around obvious technical levels. Large market participants who need to enter or exit big positions prefer to do so where there is liquidity, so a short push beyond a level can trigger those resting orders and provide the counterparties they need. Once that liquidity is taken, there may be nothing left to continue the move and price falls back.
Other common causes are short-term news spikes during low-liquidity sessions, aggressive day-trader reactions, or exhaustion after a long trend. In forex, where there is no single consolidated exchange volume, these dynamics play out across multiple venues and timezones, which can make sudden, short-lived breaches more likely.
How to recognise a false breakout — practical clues
Spotting a false breakout comes down to looking for weakness in the breakout itself rather than the mere fact that price crossed a level. The following signals often accompany a failure:
First, pay attention to how candles close. A genuine breakout is usually followed by one or two clean closes beyond the level. If the breakout candle has a long wick that closes back inside the prior range, that is a rejection candle and often a warning.
Second, check momentum. If price makes a new high (or low) but indicators such as RSI or MACD fail to confirm that strength — for example RSI makes a lower high while price ticks higher — momentum divergence suggests the breakout lacks buying or selling power.
Third, examine volume proxies and volatility. Forex does not provide a single consolidated volume number, but many platforms show tick volume or you can use volatility measures such as ATR or Bollinger Band expansion. A breakout that occurs with low tick activity or little expansion in volatility is more likely to fail than one that happens with a clear surge in activity.
Fourth, watch the retest. After a true breakout price often returns to the broken level, holds there, and then continues. If the retest slices through the level or price never returns to test it, the original breakout may be suspect.
Finally, consider context: time of day and news. Breakouts during thin sessions (e.g. late US / early Asian hours) or immediately on a headline often reverse once the market normalises.
Concrete example: imagine EUR/USD has been trading between 1.0800 and 1.0850 on an hourly chart. Price spikes to 1.0860 during a quiet session, forming a long upper wick, and then closes the hour back at 1.0835. An RSI that failed to move above its prior high and low tick activity during the spike would combine to suggest a false breakout rather than a new trend start.
Simple rules to reduce getting caught
A few straightforward habits will reduce the number of times you get stopped by a fakeout. First, use confirmation: wait for one or two candles to close beyond the level on the timeframe you trade before entering. Waiting costs you a bit of price, but it filters many poor moves.
Second, trade in the direction of the higher‑timeframe trend. Breakouts that align with daily or 4‑hour structure have higher odds than those that go against the dominant trend.
Third, set stops sensibly using volatility as a guide. Rather than putting a stop a few pips from the level, use a multiple of ATR or place stops beyond the extreme wick of the breakout to avoid being taken out by ordinary noise.
Fourth, use multiple timeframes. A breakout on a 15‑minute chart that is contradicted on the hourly chart is more likely to be false.
Fifth, combine confirmation tools: price action, momentum indicators, volatility, and context (session and news).
Two practical ways to trade false breakouts
You can treat false breakouts either as something to avoid or as an opportunity. Two common approaches are fading the breakout and trading the retest.
Fading the breakout means taking the opposite side once the price fails and returns into the range. A typical fade setup is when price breaches resistance, prints a long rejection wick and closes back inside. You might enter short on the first close back into the range, place a stop above the fakeout wick, and target the middle or opposite side of the range. This approach aims to capture the selling pressure created by trapped breakout buyers.
Trading the retest is less aggressive. After a breakout beyond resistance the price often comes back and tests the broken level. If the retest holds and price shows a clean rejection from the retest (for example a pin bar or an engulfing candle), you can enter in the breakout direction. If instead the retest fails and price slips back through the level, that confirms a false breakout and offers an opposite trade setup.
Example: On a 4‑hour chart a pair breaks below a support zone and then rallies back to that zone. If the return produces a bearish pin bar and the higher timeframe trend is down, entering short there with a stop above the pin bar wick targets the next swing support. If the price instead climbs cleanly through the retest that would invalidate the fade.
Trade management and position sizing
Because false breakouts are unpredictable, disciplined risk management matters. Limit risk per trade to a small percentage of account equity and size positions according to the distance between your entry and stop. Use stop-loss orders placed where the market structure is invalidated — for example beyond the high of the fakeout wick or a multiple of ATR — rather than at arbitrary pip distances.
Consider scaling in or taking partial profits: if a trade moves quickly in your favour after a fade, reduce exposure by taking some profits and trail the rest. On the other hand, if you trade breakouts that survive the retest, a trailing stop placed behind swing structure lets you ride momentum while protecting gains.
Examples woven into the narrative
Picture GBP/USD forming a clear trading range between 1.3000 and 1.3100 on a 1‑hour chart. During the London session, price bursts above 1.3100 and spikes to 1.3130, but closes the hour back at 1.3070 with a long upper wick. The spike happened when liquidity was thin and no meaningful tick volume increase appeared. Traders who bought the spike were now exposed. A trader cautious of false breakouts would either wait for a second hourly close above 1.3100 or consider shorting after the rejection, placing a stop above 1.3130 and targeting back toward the middle of the range.
In another case, EUR/JPY breaks down below support but then returns to the former level and forms a small bullish engulfing candle on the retest. That retest holding suggests the breakdown was genuine and offers an entry in the direction of the breakout with a stop above the retest high.
Risks and caveats
False-breakout trading is not a guaranteed edge; it carries clear risks. Some breakouts that look false are in fact the early stage of a strong move — fading these can produce large losses. Slippage, spread widening, and gaps around news events can make stop placement and execution unreliable, especially for retail accounts. In forex the lack of a single volume figure means traders must rely on proxies (tick volume, volatility indicators), which are imperfect. Over-reliance on a single indicator or rigid rules without adapting to market conditions also increases vulnerability.
Backtest any false‑breakout method on the pairs and timeframes you plan to trade, practise in a demo environment, and keep a trade journal. Above all, remember trading carries risk and this article is educational, not personalised trading advice.
Key takeaways
- False breakouts occur when price briefly breaches a level but lacks follow-through; watch for rejection closes, momentum divergence, and weak volume/volatility as warning signs.
- Reduce risk by waiting for confirmation (extra closes or a clean retest), trading with the higher‑timeframe trend, and sizing positions to volatility.
- Two common tactics are fading the failed breakout after a clear rejection or trading the retest when the level holds.
- Always use disciplined stops, adapt to session and news context, and practise strategies before risking real capital.
References
- https://www.myfxbook.com/community/new-traders/how-identify-false-breakouts-forex/3204612,1
- https://www.equiti.com/sc-en/news/trading-ideas/how-to-identify-and-trade-fakeouts-a-complete-traders-guide/
- https://priceaction.com/price-action-university/strategies/false-break-out/
- https://www.babypips.com/learn/forex/how-to-trade-fakeouts
- https://www.babypips.com/learn/forex/summary-of-trading-breakouts-and-fakeouts
- https://tradethatswing.com/false-breakouts-are-key-trading-opportunities/?srsltid=AfmBOopu8f-czkbrKNzhwTPVqt_wfqNcB5cEBNRApxbAZAlVKDMIY3hX
- https://tradethatswing.com/false-breakouts-are-key-trading-opportunities/?srsltid=AfmBOoplKe2tWk-B8G_BVYZwqju5BqEjer-XFwz6h-xboi_20vzUelR3
- https://www.luxalgo.com/blog/5-false-breakout-strategies-for-traders/