By AKTV | Technical Analysis
Read in Hindi: स्टॉक मार्केट का जाल: फेक ब्रेकआउट क्या है और इससे कैसे बचें
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The Stock Market Is a Trap, But Only If You Don’t Know How It Works
Friends, the stock market is a trap in which most people get caught and lose their entire money. But a small number of people who understand this trap make enormous profits here. Today we are going to explain this trap to you in completely simple language.
Almost every day, this happens repeatedly in the market, a breakout occurs at an important resistance level, and small traders like you put a stop loss and take a buy entry expecting the market to go up. The market shoots up briefly. But then, within a short time, it comes back down and hits everyone’s stop loss. This is the market’s trap, and it is called Trap Trading or Fake Breakout.
What Is a Fake Breakout?
Let us first understand the basics of trap trading. Imagine an important resistance zone on the chart. The market breaks out above this resistance and small traders enter their buy positions. But then the market reverses from that exact point and hits their stop loss. This is called a Fake Breakout.
Now you must be wondering that who sets this trap? The answer is Operators. These are big institutional players who can throw crores of rupees into the market at one time. Their goal is to take the market to the resistance level, cause a breakout, let small traders enter thinking it is an opportunity, and then push the market in the opposite direction, eating up all the retail stop losses.
Trading is a zero-sum game where one trader’s loss is another trader’s gain. When a breakout happens, operators take massive positions on the opposite side to stop small traders from profiting and to push the market their way. This is how small players’ money ends up in big players’ hands.
How to Identify a Fake Breakout Using Volume
Friends, to identify a real breakout from a fake one, the most important tool you must analyse is Volume. Even if price does not tell you everything, volume will always tell you the truth. Volume also tells you when big players are executing large orders in the market.
As we have always said, in the ocean of the market, you must always swim with the big fish, never against them. That is why reading volume becomes extremely important. Those who ignore volume and rely only on price, listen carefully! you will get fooled again and again.
If you do not know how to add volume to your chart, it is very simple. Go to the indicators section and search for the Volume indicator. You can easily add it. And if you trade index options instead of stocks, watch Open Interest instead of volume.
Reading Volume to Spot Real vs Fake Breakouts
Here is how to use volume to identify breakouts:
Identifying a Real Breakout:
Look at the chart. The price is making green candles moving upward. As it approaches and crosses the resistance level, check whether the volume bars are also getting longer simultaneously. If yes, then, that is a good sign. There is strong buying pressure.
Then during the retracement, if the volume candles are smaller than before; that is a signal that sellers are weak in this retracement. Not many participants are selling aggressively.
After the retracement, when price makes a big green candle, breaks the recent high and closes above the previous high then look at the volume at that moment. If the volume bar here is bigger than the retracement volume bars then this is a perfect trading setup. You can confidently build a buying position here with a good risk-to-reward ratio.
Yes, our decisions can never be 100% correct in the market, but this setup will give you profit most of the time.
Identifying a Fake Breakout:
Now let us understand how to identify a fake breakout. When price breaks the resistance zone and closes slightly above it, volume bars are also getting bigger. So far so good. But then when price retraces from there, the volume bars are still big and getting bigger. This shows that sellers are gradually getting stronger and entering the market in large quantities.
Now when price makes small green candles trying to push up again and the volume size starts becoming smaller than the red volume bars, this confirms that buyers have now become weak.
At this point you need to mark the swing low. When price breaks below this swing low and closes below it, and the volume on that candle is also higher than the previous green candles, this is a perfect signal that your breakout has failed.
In this situation you should close your old buy position and take a short position with a good risk-to-reward ratio.
A Practical Example
Look at this chart. The market is sideways, moving only within a zone. One candle breaks the resistance zone and closes well above it. Most new traders immediately enter buy trades. But the market comes right back down and eats everyone’s stop loss.
Then the market comes near support. Retail traders, without waiting for candle closing, again build buying positions hoping the market will bounce. But the market closes below support and hits everyone’s stop loss again. Now traders’ psychology is completely broken and they start missing all future good opportunities out of fear of another trap.
Now look at this same chart from a different perspective, this time using volume. When the resistance breakout happened, there was no big volume bar. So we wait instead of entering. We watch the market come back to its support area and close below it. This time, looking at the volume indicator, we can see a big red high-volume bar forming, much bigger than the previous bars. This gives us confirmation that the market is going to go lower. We enter a short trade following risk management rules and make a good profit.
Key Levels Where Fake Breakouts Happen Most
Here are important levels where fake breakouts are most common, note these down and keep them in front of you while trading:
1. Previous Day High and Low: These are very important levels for the market. When price breaks these levels directly without pausing, a fake breakout often happens.
2. Current Day High and Low: The highest and lowest point of the current trading day can also cause fake breakouts. When price breaks these levels without consolidating first, the chances of a fake breakout increase.
3. Psychological Round Figure Levels: Levels like 26000, 25500 act like milestones in traders’ psychology. Fake breakouts are very commonly seen at these levels. For example if Nifty is trading around 26000, then 26001 becomes a critical level. If the market directly breaks this level, it could be a trap to catch retail traders. At such levels, we need to think very carefully and analyse the market from the operator’s mindset, not our own.
How to Enter Correctly in a Trap-Filled Market
Point 1: When price breaks an important level quickly without spending time there, the chances of a fake breakout are very high. Avoid such positions.
Point 2: If price pauses and consolidates at that level before breaking out, most of the time this will be a real breakout. You can take the breakout trade accordingly.
Point 3: Also watch price behaviour after the breakout. If price spends too much time at the breakout level after breaking; the breakout may fail. In that case, taking a trade in the opposite direction after getting confirmation from another point can give better results.
Remember this: If market consolidates before the breakout; it is likely a real breakout. Trade in the breakout direction. If price spends time after the breakout; it could be fake. Wait for confirmation and trade in the opposite direction.
Quick Tips for Avoiding Fake Breakout Traps
Tip 1: If you are a beginner, keep your position size reasonable and small. Beginners must remember; large quantity can give large profits but one bad day can wipe your entire account.
Tip 2: You need patience while trading. If you are not patient, you will enter trades before the right time or exit before reaching the target. Take only one to two quality trades per day.
Conclusion
Friends, that is all for today’s video. Trade with patience, always read volume alongside price, think like an operator, and avoid traps. Only then can you become a consistently profitable trader.
Watch video on this topic: Click Here
Read in Hindi: स्टॉक मार्केट का जाल: फेक ब्रेकआउट क्या है और इससे कैसे बचें
Written by: Ardan Kumar | Founder | aktv.in
Disclaimer: This article is for educational purposes only. We are not SEBI registered. Nothing here is investment advice. Trading involves risk of loss. Do your own research before trading.