Table of Contents
- What Is a Head-Fake Trade?
- Understanding a Head-Fake Trade
- The Head-Fake Trade and Breakouts
- Example of a Head-Fake Trade
- How Can I Tell If Price Is Moving in a New Direction or If It's Just a Head Fake?
- What Causes a Head-Fake Price Move?
- How Much Should I Risk on Going with a Move That Might Be a Head Fake?
- The Bottom Line
What Is a Head-Fake Trade?
Let me explain what a head-fake trade is directly to you. It's when a security's price moves in one direction, but then it reverses and heads the opposite way. I call it a head-fake because it's like in basketball or football, where a player fakes with their head to trick the opponent into thinking they're going one way, but they go the other. You'll see this most often at critical breakout points, like major support or resistance levels, or around key moving averages such as the 50-day or 200-day SMA.
Understanding a Head-Fake Trade
Picture this scenario: a major market index hits new highs even as economic fundamentals weaken. If you're a trader looking to short it, you're watching those key technical levels closely to spot any breakdown. Say the index stalls and drops below a short-term moving average—bears might pile in, thinking the decline is on. But if it turns around and climbs higher, that's a head-fake trade in action.
As a contrarian, I often look to profit from these because my approach means going against the herd. Institutions might push prices through support or resistance to grab liquidity for big orders at better prices. If you get caught in one, losses can mount, especially since head-fakes precede major trends in the opposite direction. That's why I always stress sticking to stop-loss orders to cut risks.
The Head-Fake Trade and Breakouts
After an initial breakout, expect some pullback. As the price retraces to the breakout level or a bit lower, you have to figure out if it's a head-fake—a false breakout—or just a temporary dip before the trend resumes. If it's the latter, that pullback could be your chance to enter at a better price.
Example of a Head-Fake Trade
Take 2022, when the U.S. dollar was dominating most currencies. Look at the USD against the Hungarian forint (USD/HUF)—it was in a clear uptrend, with the dollar strengthening. The chart shows several pullbacks staying within a rising channel, except one marked instance where price dipped below the uptrend support intraday but recovered by day's end.
This was a textbook head-fake: a countertrend move that looked like a break but wasn't. If you traded on that support break, you'd realize quickly it was false, especially since the pair closed back in the channel and no new fundamentals changed the dollar's strength story.
How Can I Tell If Price Is Moving in a New Direction or If It's Just a Head Fake?
Head-fakes don't last long—maybe an hour or a day. If the price breaks a key technical level but regains it soon after, it's likely a fakeout. Keep your stop-losses tight if you're trading the break, so you avoid getting trapped and can catch the trend's resumption.
What Causes a Head-Fake Price Move?
These moves usually test important support or resistance, like trendlines or key moving averages. Stops cluster around these levels, and when price hits them, it triggers buying or selling pressure. If the level is reclaimed quickly—hours for day traders, days for others—it's probably a head-fake, just a false break.
How Much Should I Risk on Going with a Move That Might Be a Head Fake?
Since head-fakes are countertrend by nature, use tight stops. Risk only a quarter to half your usual position size on these setups—it's conservative given the uncertainty, limiting your capital exposure while keeping losses small.
The Bottom Line
A head-fake is a false breakout of a key technical level, like when an uptrend dips below support briefly, catching traders off guard and potentially leading to big moves. These are common in markets, often at significant points due to stop-loss activity. To decide if it's real or fake, check how long the break lasts and if there's fresh news supporting it. No news? It's likely just a head-fake, so stay vigilant.
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