Head-Fake Trade
Candlefocus EditorThe head-fake trade is typically caused by one or several investors setting stop-loss orders or taking profits at these mentioned points. This sudden shift of equity can push the asset/market price further away from the brink of reversing and give the perception that the current trend is still in motion. When this happens, many investors who were anticipating a possible turnaround, who had already placed their orders, will be caught out by the deception, and the move may continue further and further against the expected direction.
Traders should be aware of these false signals and recognize that any strong, sudden movements away from a trending direction may be nothing more than a head-fake trade. These trades can, however, lead to significant losses, as they often occur just before the start of a major, sustained trend in the opposite direction. By being aware of this phenomenon and its potential effects, a trader can prepare and adjust his strategies accordingly to remain ahead of the markets and the head-fake trades.
It is also essential to implement proper risk management techniques when trading. This can mean setting proper stop loss orders or taking various precautions to ensure that any losses that could arise from a head-fake trade are minimized or eliminated. This way, a trader can ensure that any potential losses are manageable, and that his or her trading strategies remain intact.
To conclude, head-fake trades are an important concept to understand in trading. Though they can lead to significant losses, a trader should be aware of their potential and adjust their strategies accordingly to remain ahead of the markets and ensure their strategic progress.