A fakeout is a market situation in which a movement or signal foreshadows a certain trend that will later be rejected or falsified.
A fakeout can occur following a false breakout of a support or resistance level, which has convinced investors to sell or buy an asset respectively. In this case, the fakeout is a false breakout: the price only momentarily crosses the level, reversing almost immediately; this then causes financial losses or missed gains for those who do not recognise it.
Fakeouts generally indicate any disappointment of a trader’s expectations, not only bullish or bearish. Moreover, in fakeout situations, investors usually act in advance of price movements, before they occur, based on forecasts; on the other hand, during Bull Traps and Bear Traps, the change in trend is already in place and observable.
There is no precise strategy for accurately recognising a fake out. Many investors, however, rely on technical analysis tools such as volume analysis, moving averages or oscillators to distinguish them from actual breakouts.