Spotting Real Breakouts (and Avoiding Fakeouts)
As you’ve learned, after a strong trend runs for a while and starts to consolidate, two outcomes are possible:
-
The trend continues (a continuation breakout)
-
The trend reverses (a reversal breakout)
Wouldn’t it be great if there was a way to tell the difference—and avoid getting caught in fakeouts?
Good news: There is!
In fact, there are a couple of handy tools that can help you detect whether a trend is losing steam and a reversal might be around the corner.
1. Moving Average Convergence Divergence (MACD)
By now, you should be familiar with MACD. If not, be sure to check out our full lesson on it—it’s one of the most popular tools in a trader’s arsenal for a reason.
MACD helps gauge market momentum, and it’s particularly useful when that momentum starts to fade.
One of the most insightful ways to read MACD is through its histogram. This histogram represents the distance between the MACD line and its signal line.
Here’s what to watch for:
-
When the histogram bars grow, momentum is increasing.
-
When the bars shrink, momentum is weakening.
So, how does this help with spotting a potential trend reversal?
Simple: Look for divergence.
If price continues to rise, but MACD’s histogram starts shrinking, it signals that momentum is fading—despite the trend continuing. That’s often a red flag that a reversal could be coming.
📌 Example: Price is climbing, but MACD is declining → possible bearish reversal ahead.
2. Relative Strength Index (RSI)
Next up is the Relative Strength Index (RSI)—another momentum indicator, and another solid tool for spotting reversal breakouts.
RSI measures the strength of recent price movements by comparing gains and losses over a set period.
Just like MACD, RSI can show divergences. When price and RSI move in opposite directions, it can indicate a weakening trend.
But RSI also adds something extra: it shows when the market is overbought or oversold.
-
RSI above 70 = Market may be overbought (price has risen too fast)
-
RSI below 30 = Market may be oversold (price has fallen too far)
During a strong trend, RSI often remains in overbought or oversold territory for a while. But when RSI starts to pull back inside the 30–70 range, it can be a signal that the trend is about to reverse.
📌 Example: RSI sits above 70 for a long time, then dips below 70 → possible downward reversal incoming.
Wrapping Up
By combining chart analysis with momentum indicators like MACD and RSI, you can better assess whether a trend is likely to continue or reverse.
And best of all, you’ll be less likely to fall for those sneaky fakeouts that trap so many traders.
Breakouts can offer great opportunities—but only if you know what to look for.