In cryptocurrency markets, A fake-out is a technical analysis concept used by cryptocurrency traders. It describes a situation where a trader, anticipating a price movement enters a position in the market — but the price movement never happens. If you are asking the question, what is a fake-out? then you will find the answer in this article.
We remind our users that they should conduct the necessary research and education in risk management principles, act in accordance with their risk-return levels, and use the methods they are most comfortable with.
Firstly: what is technical analysis?
Technical analysis is a method used in most financial markets, be it cryptocurrencies, stocks, foreign exchange, or commodities. It is used to predict which direction markets will move in based on historical price information. In technical analysis, measures such as the price and volume of cryptocurrencies and characteristics such as support, and resistance levels are determined. Some people choose to make predictions from such indicators.
What is a fake-out in a cryptocurrency market?
A fake-out is a scenario where trade is made with the expectation of a price movement in the future. Unfortunately, this anticipated price change never comes to fruition. The investors take their interpretation of the chart as fact, assuming that the price movement is inevitable. However, the perceived movement does not continue after a sudden change in the graph.
How do you avoid a fake-out?
Investors have techniques to avoid fake-outs. Many methods used in technical analysis reduce the possibility of misinterpreting the chart and therefore losses. One way to do this would be to apply more than one method simultaneously. For example, when using the candlestick method, traders might also want to consider factors like interest rate policy or worldwide economic conditions. Not being reliant on a single indicator reduces the risk of fake-out.
Fake-out and retests
One of the methods used by investors to minimize the possibility of fake-out is a retest. A retest is where an investor identifies the support and/or resistance levels for a cryptocurrency asset and waits for a break. When a break occurs, the investor waits it out to see where the price ends up, choosing not to take a position. If, after the break, the price returns to its initial position then the trader has found the confirmation price — they have gained an idea of the market’s perceived value of that cryptocurrency.