How to Identify Institutional Fake Breakouts and Trade Them Properly?

Last Updated on February 7, 2025 by Arif Chowdhury

Ever watched the market whip around, only to find out it was all smoke and mirrors?

Yeah, I’ve been there too.

As a seasoned Forex trader since 2015, I’ve seen my share of “breakouts” that turned out to be complete traps.

Understanding how to spot institutional fake breakouts can save your account and boost your trading game.

Let’s break it down, shall we?

What Are Fake Breakouts?

Fake breakouts happen when the price moves past a key support or resistance level, only to reverse shortly after.

Why does this happen?

Institutions often create these scenarios to shake out retail traders.

They push prices up or down, triggering stop losses and causing panic among traders.

Statistically, about 70% of breakouts fail.

That’s a huge chunk of potential losses.

So, how do we navigate this minefield?

Volume Analysis
- Look for low volume during the breakout.
- A genuine breakout usually has a surge in trading volume.
- If the volume is weak, it’s likely a trap.
Candlestick Patterns
- Watch for reversal patterns like pin bars or engulfing candles.
- If you see these right after a breakout, it’s a red flag.
Market Sentiment
- Pay attention to news and economic indicators.
- Fake breakouts often occur during high-impact news releases.
- Use a reliable economic calendar to stay ahead.
Divergence
- Check for divergence between price and indicators like RSI or MACD.
- If price makes a new high but the indicator doesn’t, it could be a fake breakout.

I remember trading the GBP/USD a few years ago.

It broke above a key resistance level, and I got all excited.

But then, I noticed the volume was unusually low.

I hesitated, and guess what?

It reversed hard, tanking right back below resistance.

I dodged a bullet just by being aware of the signs.

So, how do you actually trade these fake breakouts?

Wait for Confirmation
- Don’t jump in immediately.
- Wait for a candle close back inside the previous range.
Set Tight Stop Losses
- If you decide to trade a breakout, keep your stop loss close.
- This minimizes potential losses if it turns against you.
Utilize Limit Orders
- Instead of market orders, use limit orders to enter at better prices.
- This way, you can capitalize on the retracement after a fake breakout.
Stay Calm and Rational
- Don’t let emotions dictate your trades.
- Stick to your strategy, and don’t chase after price.

If you’re serious about improving your trading, consider using automated solutions.

I’ve developed a portfolio of 16 sophisticated trading bots that work across major currency pairs like EUR/USD, GBP/USD, USD/CHF, and USD/JPY.

These bots use H4 charts and focus on long-term trades, aiming for 200-350 pips.

They’re designed to minimize correlated losses and enhance overall profitability.

You can check them out at my trading bot portfolio.

To maximize your trading success, you need the right broker.

I’ve tested various platforms and recommend checking out the best Forex brokers available.

This ensures you have the best tools at your disposal.

Fake breakouts can be frustrating but recognizing the signs can turn you into a more disciplined trader.

Keep your eyes peeled for volume changes, candlestick patterns, and market sentiment.

And remember, whether you’re trading manually or using bots, always trade responsibly.

You’ll find that understanding these concepts can significantly enhance your trading experience.