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Forex Trading Strategy Based On A Fakey Pattern

Author: Martin Moni
Martin Moni
All publications of the author

It is easy to get a clue about this particular dealing strategy just from its name, which is derived from its nature. A fakey candle model appears during a false breakout in the arenas beyond particular support and resistance (S/R) levels. It is a very clever form of dealing, which ends up producing huge amounts of profit if executed correctly. However, it requires a very keen eye to observe it in action, but the benefits are definitely worth it. To begin this lesson, it’s important to first observe the principles behind it before we look at how it can be applied in day-to-day dealing.

How and why does the fakey model appear in dealing charts?

As we’ve already mentioned, this is the kind of candlestick model that occurs around S/R levels. At these points, the bulls and bears compete for control over the arenas, and the prices are volatile. Such a struggle could be observed simply by observing the Forex charts online closely. When a fakey model occurs, it can either be bullish of bearish, appearing as such on the charts:

As you can see, both of these fakey models occur following the formation of an inside bar (IB) model. That is why the dealing strategy is also sometimes referred to as the IB false breakout dealing system. This is the typical way in which the model is formed, but you should be aware that it is not always perfect, which is why you need a keen eye to understand candlestick models. Usually, an IB candle model forms when there is about to be a reversal in the arena trends. From the image above, on the left we can see a bullish IB had formed, which would usually indicate that the trend was about to shift upwards. However, this was in fact a bearish fakey model that eventually caused the arenas to continue downwards. On the right, we see the opposite happening where the IB would have typically caused arenas to go downwards, but instead the fakey showed the uptrend was resuming. (These are the: 7 Powerful Candlestick Models to Learn and Understand)

In the above examples, the fakey presented with a normal candlestick following the IB. In other cases, it can be in the form of a pin bar following the IB such as that shown in the image above. The principle is the same, only the fakey now appears on the same candlestick instead of two.

The main idea behind this dealing system is to think like the sharks in the arena. What they do is to create a false breakout around S/R levels so that they can hit traders’ take profit and stop loss orders, leaving a ‘vacuum’ in the arenas they can dominate. Take the example below where the arenas had been dealing within a range for a long time. (Learn: How to draw S/R levels like a pro)

Because the S/R levels have been tested and retested, they have become strong over time and traders expect this to keep happening. As a result, most traders would have place their take profit levels around the key resistance level on that final upswing. For the bears, they would need to eliminate all the buy orders in order to eliminate all the bulls. To do so, they intentionally pushed the arenas upward to hit all the take profit orders and remove all the buyers. Thereafter, the bears could dominate the arenas and push the arenas downwards and even break the support level below. Therefore, this fakey dealing system allows you to observe and anticipate what the sharks are doing and follow their lead.

How to use the fakey model in actual dealing conditions

It is not enough to see the fakey model in theory, but to look at it on the actual Forex dealing platforms. To do so, we shall have to look at the different ways this dealing system could be used. Fortunately, this system is very versatile and can be used to trade in both ranging and trending arenas to observe the trades made by the sharks. (Know these: Forex arena sentiment indicators)

Using the fakey in range-bound arenas

This is the best use of the fakey because it helps you to determine whether there is actually going to be a breakout or not. Since there are so many false breaks that occur around S/R levels, it is good to be right more often than wrong if you want to keep your money and make more. An example of a fakey model in a ranging arena can be observed in the image below of the AUD/USD pair that had been ranging for more than 8 months. (Tips on: Identifying the false breakout dealing strategy)

In the image, the area shaded in green marks where the fakey model formed in the arenas as the bears tried to trap the bulls. At that area, there was a bullish IB that had formed just after prices had bounced off the resistance level. Given the location, it seemed likely that bears were being exhausted by the bulls, and that selling pressure would wane. If that would have happened, the resistance level would have been broken through and an uptrend would begin. Instead, this was a fakey model. (This is: All you need to know about pivot points)

The bears trapped the bulls by allowing a bullish candle to form right after the IB, and many of them believed the resistance would be broken. Instead, this bullish bar was followed by a bearish candle that turned the tide and kept the arenas in range. Many of those traders who had opened long positions hoping for the breakout were caught out and their trades were closed out after hitting the stop losses. For those who forgot to place a stop loss, their trades would keep running losses for the following two months. This is why it is always important to use proper risk management in Forex.

Just as the fakey was used in this case to keep arenas in range, it could also be used to spot breakouts. In the same AUD/USD chart, the bears used a fakey to break the support level and break the range. (The: Pivot points strategy)

Because the arenas had been within the same range for almost a year, many traders grew to believe this status quo would continue once the support level was hit. Indeed, once the support was hit, there was an IB formed at that level, proving that there was about to be a trend reversal and keeping the arenas in range. To make sure the bulls fell for this, the bears allowed the subsequent candle to rise and appear as if it would be a bullish candle. It was only later that tis turned out to be a pin bar and prices started falling sharply. Those buyers who had placed their stop losses below the support level were quickly stopped out leaving no competition for the bears. Following this breakout, the bears dominated the arenas and created a strong downtrend that lasted another five months. (Here are several: Breakout dealing strategies)

Using the fakey in following trends

Apart from its use in ranging arenas, the fakey is also applicable in trending arenas whereby the sharks try to make it appear as if the trend was about to change. In doing so, a lot of traders who were expecting the change end up on the wrong side of the arenas and quickly start to lose money. An example of such a situation can be seen below when a fakey model formed in a arena trending upwards at the area shaded in green. (All about: The pullback dealing strategy)

Here, the fakey model formed with a pin bar following the formation of an IB model. Many traders would have thought that the IB indicated strong bearish momentum and that the support level would be broken. To lead them on, the bulls in this case allowed the prices to drop right up to this level in a strong bearish candle and even create a false break on the trendline moving upwards. Soon thereafter, the bulls placed their long positions, stopping out all those who assumed the arenas were going down. All the bears were stopped out, allowing the uptrend to resume unopposed. (The: DeMark trend-dealing method)

When to enter the arenas following a fakey

Knowing what a fakey model looks like is not enough to be ready for the actual arenas, you also need to know when to enter the arenas precisely. The main idea is not to enter the arenas during the formation of the fakey model but rather wait until it is complete. That way, you are sure that the model is indeed a fakey and that the IB formation was a false breakout. To put this visually, here’s an image: (Everything you need to know about: Using trendlines in your Forex dealing strategy)

When an IB forms, the preceding candle is known as the mother bar because it completely engulfs the IB’s body and wicks. On the image to the left is a fakey model with a pin bar. The IB indicated a false break to the upside, and the long wick of the third candle fooled traders that the arenas were indeed going upwards before the true arena direction was discovered. To enter such a trade, you have to wait until the third candle is formed, then place your sell order after the upcoming candle breaks both the inside and mother bars. A riskier approach would be to wait until only the IB is broken, but that may be too risky for some. The safest option is to wait for the mother bar to be broken, proving that the model was indeed a fakey. (More about the: Trend rider V3 Forex dealing strategy)

On the right is a fakey model with a 2-bar false break. In that case, you should wait for the fifth candle before entering the arenas. Nevertheless, the rules remain the same – wait until the mother and IBs are broken.

What to remember when dealing the fakey model

We have seen how useful the fakey model can be in various arena situations, but there are still certain things you need to know before going out into the arenas. First, you should not use this system in arenas that are too volatile such as around critical events on the Forex calendar. The reason has to do with the basic idea behind this strategybeing to take advantage of traders’ assumptions. For example, in a ranging arenas, traders expect that prices will remain within a range. These expectations can be used against them when a breakout follows. During news announcements, though, traders are usually very cautious and don’t make huge commitments, hence the strategy cannot work effectively. (Do you know: How to work with the economic calendar?)

The next thing to remember is that the model will not always appear as perfect as it did in the examples above. Inasmuch as they say models keep repeating themselves, there are subtle differences every time. Since you cannot expect the entire model to remain the same, the two most important things to remember are:

  1. there has to be an IB formed, usually around a key pivot point
  2. a clear false breakout from the IB thereafter

As long as these two conditions are fulfilled, you can be confident that it is indeed a fakey even though it may not have the exact same model as the typical fakey. (Sources of Forex dealing information)

 

To see a live trade with the fakey, watch this short video:

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