Everything you need to know about crypto fakeouts

The term “fakeout” made the rounds last week as Bitcoin and Ether recorded significant gains, raising hopes of a recovery from the current crypto winter. A fakeout is nothing more than a failed or false breakout where prices move outside of the trend, creating the illusion of a rise or fall in prices. But shortly after this trend break, the price reverts to a similar position as before.

It is a term that originates from the stock markets, but is often used in crypto due to its highly volatile nature. Fakeouts can cause a lot of pain for investors who trade on these premature price movements. In some cases, the forgery may even match several other technical indicators, creating further confidence among traders/investors. They can then buy/short a certain crypto asset, resulting in large losses when the price resumes its normal trend.

What can cause counterfeiting?

A fakeout can be a trend deviation – a random occurrence of events that causes the price of an asset to briefly break from the trend, only to return within the range after a while. However, a fakeout can also be induced by illegal activities such as counterfeiting or laundering, where traders create false demand/supply in the market to influence prices. These bad actors deceive the market participants about the price of an asset and profit from these short-term movements.

How to spot a fake?

You can use two indicators to detect fakeouts: trading volume and RSI. Trading volume indicates the amount of a particular crypto being bought and sold during a specific period of time, usually the last 24 hours. If the price of an asset breaks a trend during low or declining trading volume, it is likely a fake.

On the other hand, RSI stands for relative strength index. It is a technical aspect that indicates the strength and momentum behind a price movement by measuring its speed. The RSI is usually plotted below the graph of an asset price. Therefore, if the price starts to break from the trend, but the RSI shows downward momentum, then you are most likely dealing with a fakeout.

How to limit false losses?

One way to limit losses in case of a crypto fake is to enter a position with a limited amount of capital and use the stop-loss option to limit potential losses. A good idea would be to set the stop loss a pressure below the lowest level of the last candlestick if you are going long. On the other hand, you can place the stop loss slightly above the top of the last candlestick if you go short.

A potential crypto counterfeit can also be averted by considering several technical indicators before entering a position. Relying on a single technical analysis is never a good idea, especially in a market as volatile as crypto. If you consider several analyzes and all give the same signal, it indicates the strength of the signal. But even in this case, there is no guarantee that entering a position will lead to profit. At times, the financial markets can behave strangely and even the strongest signal can turn out to be a crypto fake.