A Fakeout, or sometimes referred to as a Fake Breakout is a sometimes event that can fool investors and lead to significant losses. In essence, a fakeout is when the price of an asset ‘breaks out’ of its presumed value trends, but quickly reverses.
This phrase is often used by Techincal Analysts when attempting to understand an unexpected reversal after an unexpected price hike. Sometimes investors can witness an asset breakout of its expected price point and therefore are encouraged to invest, attempting to capitalize on the new emerging trend. Though these trends can be short-lived, or suspect to outside factors that can quickly turn the new trend around, leading to investors losing value.
Don’t Be Fooled
Clever investors use a host of various factors to improve the profit potential of their portfolios. By combining a host of mathematical formulae, technical indicators, and underlying asset knowledge investors can better predict market trends. Wise market analysis and a clear understanding of interlocking factors such as Resistance, Support, market volume, and depth can aid investors. However, even wise investors can be ‘caught out’ by unexpected market happenstance. Outside factors, sometimes referred to as unsystematic risks, or diversifiable risks can lead to sudden upsets.
To offset this potential investors will employ, not only depth full market trend analysis but also investment contingency plans. One means of avoiding fakeout losses is to create stop-loss positions on one’s investments. Effectively limiting the absolute amount of losses one can incur on their investment by placing a sell order, on a particular price point. Wise market positioning can turn a potential devasting loss, into a relatively small upset.
Another way of offsetting this potential for loss is for investors to maintain diversified portfolios. Diversified portfolios are better insulated from the potential losses found from sudden asset fakeouts.