When identifying levels from which to trade, we usually consider a level to be strong if price has not been able to break through it. Once it is broken we ignore it and wait for the next setup. This is generally good practice. There are occasions however, where price will break through your pre identified level and then reverse as expected. This is known as a fake out (FO) and is the focus of this piece.
Price action is a big piece of the puzzle when it comes to trading and this is why we use it in conjunction with supply and demand.
What follows is a recent example of a fake out at a supply level so we’ll look at what happened and how these opportunities can be traded.
The daily chart below, you’ll see both a supply and a demand level. These are the same levels we looked at in the last article on profit potential. There are also clear green candles going up towards the level which is what we like to see to ensure a reasonable amount of profit potential on the trade.
The H1 chart shows the same supply level I identified in the last article only this time you see the reaction. You will notice that price broke up through the supply level but this was just a fake out to trick you into either going long on break, or avoiding the trade altogether. Those who entered short with limit order may have stopped out of this depending the stop placed but waiting for PA to get you in as I often like to do would have led to a perfect opportunity.
The 5m chart tells the rest of the story.
As always, I mark up the nearest opposing level (demand) and wait to see what happens next. The lower demand line appeared first and held on the first test. Later that night another demand level formed further up into the H1 supply level. Price broke both of the 5m demand levels and formed new supply around the same area place as the top 5m demand. This is also a swap zone. After price reached the supply it fell right down to the last turn in price on the daily chart, the open of the green momentum candle that rallied into the level.
The great clue here that price would indeed reverse, was in the price action on the 5m chart. If price was looking to continue heading up through the supply and beyond then the price action would have let you know by:
- Breaking straight through without looking back
- Breaking through the level with a confident close above before a retest and continuation.
Instead price broke the first two demand levels in quick succession and created supply. It was pretty clear that sellers were now in control and that price was heading down.
This is another reason why it’s great to wait for PA to get you into a trade.
I hope you found this useful.