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What is a head fake?

Head fake

In standard terms, a head fake refers to when a player moves their head to fake a change in direction. In finance terms, it is when a market looks to be moving in one direction but then ends up moving in the opposite direction.

Key takeaways:

  • A head fake is a misleading signal in trading that causes investors to make false assumptions about the direction of a market trend.

  • A head fake can occur in any financial market and is often caused by sudden market volatility or manipulation by market participants.

  • Traders must be vigilant and learn to distinguish a head fake from genuine market movements to avoid losses.

  • Technical analysis and chart patterns are popular tools used to identify head fakes, but they require careful interpretation and should not be used in isolation.

Where have you heard about head fakes?

The record bull market that began in March 2009 saw a significant amount of head fakes including the 'Flash Crash' of May 2010. This event saw various stock indexes collapse and rebound rapidly, lasting just over half an hour but costing trillions.

What you need to know about a head fake

Trade during a head-fake usually happens at key breakout points, for example major support or resistance levels. Take the example where major market indices have been hitting new highs. Traders will be closely monitoring its technical levels to assess whether the advance is set to break down. In a situation where the index advance stalls and drifts lower, the bears may rush in based on their trading view that the index decline has begun. However, the index may subsequently switch direction and head higher, making it a classic head-fake trade.

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