What is Head Fake Trade?
Head fake trading is when the price of a security moves in one direction and then reverses the course and moves in the opposite direction. The name Headfake Trade comes from a tactic commonly used by basketball and soccer players to drive away their opponents by pretending to be moving in one direction but in the opposite direction. increase. Head fake trades most often occur at major breakout points such as major support and resistance levels, or with carefully monitored moving averages such as a 50-day or 200-day simple moving average (SMA).
- The head fake trade moves in one direction, but reverses the course and moves in the opposite direction.
- Head fake trades most often occur at key breakout points such as key support and resistance levels, or carefully monitored moving averages.
- Headfake trading often occurs before the start of a major trend in the opposite direction, which can lead to significant losses.
Understand fake transactions
Consider a situation in which major market indices have hit new highs as economic fundamentals deteriorate. Traders looking to short-circuit the index will carefully monitor key technical levels to assess whether progress is beginning to collapse. Suppose Index Advance stalls and begins to fall below the major short-term moving averages. Bears may rush at this point, based on their view of the trade that the index has begun to fall, but if the index then reverses course and rises, this is a classic fake trade. Become.
Opponents often seek to benefit from fake head transactions, as their trading philosophy embraces the willingness to oppose the crowd. They support institutional investors to find additional liquidity to fill larger orders at better prices for their customers, especially in the forex market without centralized regulators / It claims to push up the price of securities through the resistance territory.
Traders and investors who fall into headfake trading can incur significant losses as they often occur before major trends in the opposite direction begin. In such cases, adhering to strict stop-loss limits can help minimize risk.
Head-Fake Trading and Breakouts
Usually, the first breakout is followed by some pullback. When prices return to their original breakout level or higher, traders will have to determine if the pullback is the beginning of a headfake (wrong breakout) or temporary, and the market will soon be on the market. Occur. In the latter case, pullbacks may offer another opportunity to get into the breakout move.
Flash Crash Head-Fake Trading
The record bull market, which began in March 2009, has created many fake deals over the last decade. Perhaps the best-known example was the May 6, 2010 “flash crash.” The Dow Jones Industrial Average (DJIA) chooses most of its losses after plunging about 1,000 points in a few minutes in daytime trading. Traders who have made long-term bearish bets on US stock indexes based on the view that a “flash crash” is a precursor to the new bear market will see these indexes hit record highs in the years that follow. I suffered.
An example of head fake trading
PayPal Holdings Inc.’s share price fell below both the 50-day SMA and the May 13 swing in a textbook headfake trade on June 3, 2019. This is the main support area. The next trading day’s share price rose 3%, surpassing the support area, giving the first clue to the possibility of fake trading. PayPal’s share price continued to rise in subsequent trading sessions, with fake trading confirmed on June 10 when the price exceeded its previous high and closed.