Signals and indicators
False breakout
Also called: fakeout, bull trap, bear trap
A false breakout is a move beyond support or resistance that fails to continue and returns inside the earlier range, trapping traders.
A false breakout is a break that does not hold. Price moves beyond resistance or support, draws in traders expecting continuation, and then returns inside the old range. A failed break upward is called a bull trap, because buyers are caught. A failed break downward is a bear trap. Fakeout is the general slang for both.
They happen for ordinary reasons. Stop-loss orders cluster just beyond obvious levels, and price often runs to them, fills them and finds no further interest. Breaks on thin volume, breaks around midday when participation is low, and breaks straight into a bigger level on a higher timeframe are all prone to failure.
In Indian markets they are frequent in the first minutes after 9:15 am, when the opening move can reverse completely, and on index option expiry days, when the index swings around popular strikes. Bank Nifty is quick to spike through a level and reverse within one candle. Low-volume stock futures can break a level on a handful of orders.
The common mistake is treating every failure as bad luck instead of a cost of trading breakouts. You cannot avoid them; you can only make them cheap with a sensible stop-loss and size. The second mistake is reversing instantly on every failure. A failed break is information, but it is not automatically a trade the other way.
Worked example
A bull trap on a 5-minute Nifty chart
Illustrative numbers: Nifty has resistance at 25,050. Price spikes to 25,068 and a trader buys at 25,060 with a stop-loss at 25,020, a risk of 40 points. The candle closes at 25,035, back under resistance. Two candles later price touches 25,020 and the trade is closed for a 40-point loss plus costs. A trader waiting for a close above 25,050 took no trade, because that candle closed at 25,035.
In WizeBuySell
No indicator avoids false breakouts, and the WizeBuySell strategies are no exception. A clean-looking entry can reverse over the next few candles and end at the stop-loss marked on the chart. Filters cut some out: Nifty Bull & Bear Spreads stands aside unless the daily and 3-minute trends agree. They do not remove them all, which is why every trade has a stop-loss and why we publish no accuracy figure.