Beginning
Breakouts are probably the most exciting thing that can happen in trading. A stock price builds up pressure within a certain range, and traders keep a close eye on it. When the price finally breaks through support or resistance, it usually makes big moves. But here's the catch: not all breakouts lead to strong trends. When the market turns around, traders get caught in fakeouts (false breakouts) and lose money.
Why does this happen? The answer is not just in technical patterns, but also in how traders think. Fear, greed, and herd behavior are very important in making both real breakouts and fakeouts that look real.
In this blog, we'll talk about:
What breakouts and fakeouts really are
The mental traps that lie behind them
How smart money uses psychology to change the way markets work
Helpful hints to avoid getting caught in fakeouts
Examples from the Indian stock market in the real world
What does it mean to break out?
A breakout occurs when the price moves through a clear support or resistance area, usually with a lot of volume.
Upside breakout: The price goes above resistance.
Downside breakout: The price drops below support.
Breakouts usually mean that the balance between supply and demand has changed, which leads to new trends.
Example:
The Nifty 50 crossing the 20,000 level with high volumes in September 2023 was a strong breakout.
What does "fakeout" mean?
A fakeout (false breakout) happens when the price briefly goes above support or below resistance but then quickly goes back to the range.
For example:
A stock goes above its 200DMA (200-day moving average), which makes people want to buy it, but then it goes back down, catching latecomers.
Fakeouts hurt traders because they usually buy high or sell low just before the market turns around.
The Psychology Behind Breakouts
Let's look at the psychological reasons why traders are drawn to breakouts:
1. Fear of Missing Out (FOMO):
Traders see the price breaking through resistance and worry about missing the rally.
They rush in too often at the worst time.
2. Confirmation Bias:
Traders want to know that their bullish or bearish view is correct.
A breakout is like "proof" that they were right in their bias.
3. The herd mentality:
Traders are following the crowd because prices are moving quickly.
"Everybody is buying, so I should too."
4. Too much confidence:
Traders think they can ride every breakout and don't realize how risky it is.
Market psychology is what causes fakeouts.
Fakeouts don't just happen by chance; they happen all the time because of how smart money (institutions and big players) acts.
1. Looking for liquidity:
Big players need a lot of volume to get into a position.
They push prices through resistance to get people to buy, and then they sell into that liquidity.
2. Triggers for StopLoss:
Traders often put stop losses just above resistance or just below support.
Market makers chase these levels, which causes stops to go off and then the trend to change.
3. Traps that make you feel bad:
When traders panic buy breakouts or panic sell breakdowns, professionals take advantage of this feeling.
Examples from Indian Markets in Real Life
Example 1: Reliance Industries (2020)
After a strong rally, Reliance broke through the ₹1,600 resistance level.
Traders quickly jumped in, hoping for more.
But the stock quickly dropped back to ₹1,450, trapping people who had bought it.
Lesson: Always wait for confirmations with volume and the overall market trend.
How to Stay Away from Fakeouts
1. Wait for confirmation:
Don't buy the first candle that breaks out.
Wait for a retest of the level or follow-through volume.
2. Check the Volume:
A real breakout happens when there is a lot of volume.
Low-volume breakouts are usually traps.
3. Use several time frames:
A breakout on a 5-minute chart can be noise.
Check with daily or weekly charts.
4. Look for differences:
Watch out if the RSI and MACD indicators are weak when the price breaks out.
5. Set the right stop losses:
Put stops outside of the trap area (don't stop just below resistance/supply).
6. Use the basics:
Stock breakouts that are fundamentally strong last longer than those that are weak.
How Breakouts Make You Feel
There is more to trading than just graphs. This is what traders think about:
Optimists: Breakout is a once-in-a-lifetime chance → Buy hard.
Skeptics: Don't believe the move, but get in late—this happens a lot.
Professionals: Expect both ways; use trade traps to set up positions.
The most important thing is to control your emotions. If you let FOMO control your trades, you'll end up chasing a fakeout.
How to Trade Breakouts Without Risking Anything
1. The BreakoutRetest Strategy:
You should only enter after the price breaks through and then tests the old resistance (now support).
2. VolumeWeighted Strategy:
When the breakout volume is 1.5 to 2 times the average, you should enter.
3. Partially Enter:
Instead of going all in, scale into your positions.
4. Stops that protect:
Keep a close eye on risk (for example, 1% to 2% of your capital).
In conclusion
Breakouts and fakeouts aren't technical events; they're psychological fights. Retail traders often get caught because of FOMO and herd behavior, while professionals use psychology to their advantage.
To win this game:
Understand how traders think.
Wait for confirmation.
Always be aware of risk management.
Not every breakout is a good trade. It only catches the real moves and stays away from the traps. The next time you see a breakout, stop and ask yourself, "Is this real or just my mind playing tricks on me?"
