What are Fakeouts, Shakeouts and Whipsaws?

2023年8月18日

Let's get straight into the three cronies of trading disaster when taking and holding a position.

Fake-out: (When the price makes a false breakout of a chart pattern)

A fake-out occurs when the price of a market appears to break out of a certain chart pattern.
This could be a trendline, support, or resistance level.

But then quickly reverses and retreats back within the pattern.

Shake-out: (Where the market is highly volatile and the price moves to levels that hits their stop losses and gets traders out of their trades)

A shake-out is a scenario where the market becomes highly volatile and the price moves rapidly to levels that trigger the stop-loss orders of many traders.

Stop-loss orders are pre-set risk levels at which traders automatically exit their positions to limit their losses.

A shake-out is designed to "shake out" weak or inexperienced traders from the market.
When stop-loss orders are triggered, it can create a temporary spike in the opposite direction of the prevailing trend.

Once these traders are "shaken out," the market might resume its original trend.

You’ll see this most commonly with low liquid, high volatile markets like Penny Stocks or Penny Cryptos.

Whipsaw: (This is where the market will change its most prominent direction within the day).

Whipsaw refers to a situation where the market quickly changes its direction within a relatively short period, often during a single trading day.

This can cause confusion and losses for traders who are caught off-guard.

Whipsaws can occur due to various factors, such as sudden news releases, economic data surprises, or changes in sentiment.

They are characterized by sharp price movements that can make it difficult to make accurate trading decisions.

Whipsaws are especially common during periods of high market uncertainty or when there's a lack of a clear trend.

Let’s create a quick summary of the three:

Fake-out:
(When the price makes a false breakout of a chart pattern)

Shake-out:
(where the market is highly volatile and the price moves to levels that hits their stop losses and gets traders out of their trades)

Whipsaw:
(This is where the market will change its most prominent direction within the day).