What is a bull trap, and how to identify it?

August 26, 2020


Forex Education


This is to reduce mounting selling pressure and to re-enter at lower prices for better price positions. The influx in buying demand at this point will drive prices back up. Bear traps can be intentionally created by institutions that push prices down. This pressures traders and investors into selling the asset. Once the asset’s price has decreased, the institutions and other experienced traders and investors jump back into the market to buy the asset at a discount.

bull trap bear trap

It only takes a few hours of cryptocurrency market observation to recognize that market volatility there is typically much higher than on stock markets. While it may be more of a novelty for most traders to think about, the most expensive stocks in the world are… Let me tell you that from Friday until the close on Monday was one of the hardest periods for me in my trading career. Even though I just committed myself to the possibility of a loss down to $1.68, I couldn’t stop myself from thinking, well what if the stock goes to 90 cents or zero! I mean we are talking about a biotech stock and we know how these have made and lost millions for a lot of people.

The stock found short-term support that at least delays what many view as the inevitable plummet of such a stock. The stock rallied off the lows and closed near its opening price. As such, as Tesla went from a small niche company to the dominator it is today, shorts took every bearish catalyst as a reason to add more to their position. The best way to explain what a bear trap is through the story of Tesla’s stock, which is probably the best known “story stock” in the past generation. However, using different technical tools to confirm trade entries will help you minimize losses. If you are one of those who jump into trades at any and every market move, you will lose your money.

Bear Trap Stock Chart Example

If you’re careful enough, you see that the MACD indicator doesn’t signal a price reversal. There’s also the Doji candlestick, which signals market uncertainty. If you managed to identify a bear trap, you should wait for the formation of a bullish candlestick. The bear trap is a tricky market situation that involves the potential of losing money. Still, if you know how to turn the situation in your favour, you have chances to come out ahead.

However, traps are not perfect signals and may instead evolve into catapults. When looking at a bull trap, look at the size of the congestion zone and identify support. A pullback that holds above support could be just that, a pullback. When looking at a bear trap, be sure to identify congestion zone resistance. A bounce back into this resistance zone could simply be an oversold bounce.

The study found that position sizing, rather than asset allocation, accounts for 91% of performance variability. As a short seller, you’re going to get caught in some bad spots. Risk management is the number one factor in protecting your trading account from any trade. I/we have no stock, pepperstone option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. In all, always use a stop loss as it will help you predetermine the extent of your loss and keep you in control of your trading balance.

Most are forced out of their long trades which means that they have to buy which accelerates the rally. There are a few kinds of stop-losses to choose from, including standard, trailing or guaranteed. Look for whether the asset is currently overbought, which could indicate a bearish buffettology reversal from the prevailing bullish trend. You could also wait before opening long position following a breakout, to see if the bullish trend continues. Learn more about bull traps including how to identify them and how to escape them, with examples, in this article.

As a result, the first breakout and uptrend may not be an indication of continuing price rises. Market makers know this and often use news to initiate bull or bear traps. If you see a sudden price movement with average volume, be sure to check the news before making any trading decisions.

Sometimes traders will get “FOMO” and chase into a trade because they don’t want to miss out on a potential profit-grabbing opportunity. Irrational behavior can cause prices to overshoot in the futures market. Traders who typically try to play breakouts are often driven by greed. Given the broader bearish trend in the S&P 500 E-Mini Futures, this is a great example of a bull trap. There are many possible reasons, which we’ll explore later on. But we just described something called a bull trap, which is the complete oppositive of the bear trap.

How To Avoid a Bear Trap

One way to avoid getting caught in a bull trap is to know your levels. For example, if you’ve recognized that the futures price has difficulty hurdling over a specific price level, we can assume that is resistance. To close their positions, traders buy back the stock, sending prices even higher. In turn, this creates a cascade of buying that can send prices up rapidly. Bullish traders think the recent price action signals that a downtrend has ended when it actually has NOT.

Can you bear trap a Spino?

To tame a Spino I placed down 3 large bear traps, it easily got stuck and by the time it got out it was torpor running. I easily knocked it out but I must warn you bring A LOT if narcotics mine was only level 4 and it took about 90 narcotics to keep asleep.

However, in the case that the market price falls, it will remain static. Your position closes when the market price falls below that static stop-loss price level. If you are uncertain about whether the trade you are entering is a bull trap, you may choose to be more prudent and set appropriate risk management measures. An asset with an RSI of around 70 and above is considered to be overbought, which indicates a potential bearish reversal due to profit-taking. On the other hand, an RSI of 30 and below is considered to be oversold, which means it is likely to increase in price.

What is Social Trading: Copying the Secrets ..

Especially with cryptocurrency, trading is inherently dangerous. Bear traps have the potential to deceive traders, particularly amateur and inexperienced investors. In these examples, I have highlighted my trades in penny stocks.

bull trap bear trap

They should already suspect that if the present high does not surpass the previous high, then it is in a downtrend or a range. Now that you know what bear and bull traps look like, here are a few tips on how to avoid getting stuck in a trapped trade. The opposite holds true for Bear Traps, which can evolve into Bearish Catapults.

P&F Bull & Bear Traps

In particular, a Bull Trap is a Multiple Top Breakout that reverses after exceeding the prior highs by one box. A Bear Trap is a Multiple Bottom Breakdown that reverses after exceeding the prior lows by one box. Bull and Bear Traps provide quick indications of a signal failure, but chartists should be careful not to get caught in a catapult. While this article discusses technical analysis, other approaches, including fundamental analysis, may assert very different views. Content intended for educational/informational purposes only.

Are you witnessing range expansion in the average true range indicator? Not every candle will be larger, but you want to see the bullish candles larger than the bearish candles before going long. Another way to avoid a bull trap is to wait for the indicators to provide enough dogethereum price prediction evidence that the pattern is unlikely to develop. Also, identify the old swing low on the chart, and place a sell stop order should a breakout occur. Use the cascading sell orders to your advantage and align your trades to the direction of the larger trend, which is lower.

Based on your tolerance for risk, decide how much of your assets you can risk, and size your investment accordingly. Of course, it’s a bad idea to learn the ropes of this skill in the real market. That’s why Libertex provides a demo account that provides a risk-free environment that helps you gain experience. You can select from a wide choice of instruments, for example, CFDs on assets like fiat currencies, stocks and cryptocurrencies.

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At some point, there is a breakdown from the range as the bears win, and the price falls to a new low. Just when it seems like the downtrend is about to resume, however, the bulls make a comeback and push the price back up to its previous high. Since this is a 4h swing trading chart, this support break can be interpreted as severe, causing bears to open short positions. Volume is another important indicator to look out for in both bull and bear traps. In such cases, the initial downtrend is not indicative of continuing price decreases as it is a temporary dip caused by profit-taking and institutional manipulations. Instead, the price will increase again once the institutions scoop the available assets.

So, remember if the market goes against you in a violent way, your stop thresholds have been wildly exceeded and you feel complete hopelessness. Sure, enough the market delivered a nice piece of humble pie right on time. Let’s first set the record straight, I am not suggesting that you should have huge stops of 30% or 40%. What I am saying is that once you have recognized you are in a trap , instead of panicking think through the next level down where a bounce could begin to reverse the trap.

Traders know that a support zone, when broken, becomes a resistance zone. In the same way, a resistance zone, when broken, becomes support. Candlestick patterns and formations are very important when seeking to identify potential market turning points. Those are known as “trap trades” as they lure unsuspecting traders and then whipsaw them once they take the bait. All traders have memories of trades that appeared very obvious to them, but, once they were in, the trades turned against them and ended as losers.

bull trap bear trap

Its banking subsidiary, Charles Schwab Bank, SSB , provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons. Schwab does not recommend the use of technical analysis as a sole means of investment research. When the price breaks above the previous support, you should think about a long trade .

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Optimus Futures, LLC does not imply that you cannot find better tools or opposing valid views to our opinion. We do our best to share things based on our experience and scope of expertise. Other levels traders use include 20-day moving average, 50-day moving average, and 200-day moving average. You want to see the asset get and start closing above a recent resistance level on volume to signal an actual reversal.

This is possible via spread betting and contracts for difference . For instance, if the price of an altcoin has been rising steadily over the past few days, you may believe it will continue to rise. You buy some and wait for the price to go up so you can sell it at a profit. Bull traps occur during periods of market uncertainty or when false information is circulating about a particular asset. It’s called a bull “trap” because traders who are none the wiser are made to believe that a declining asset is actually on the rise.

First, Ethereum did not break the downtrend, as the price was below the trend line . Secondly, ETHUSD couldn’t even break a horizontal resistance line . At this point, there is no evidence to suggest a meaningful low is in place for Bitcoin.

A bull is an investor who invests in a security expecting the price will rise. Discover what bullish investors look for in stocks and other assets. First of all, after a steady decline prices will rally, but not very far.

If you see a sudden reversal without a large amount of volume behind it, it’s most likely a trap. This particular bull trap tests the USD413.50 high twice before breaking support and causing the price to fall down to USD402. The chart above shows Vertex Pharma with a Multiple Top Breakout in October 2010. The breakout X-Column exceeded the prior four highs by one box. This breakout did not last long as the stock reversed with a decline back into the congestion zone .

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For example, say XYZ has a very bullish day on Monday, opening at 74.20, making an intraday low of $74.10 and closing at $79.55, with an intraday high of $79.75. As you can see the stock opened close to the low of the day and closed close to the high, creating a “big body” candle on its daily chart. On Tuesday morning a catalyst occurs which causes the stock to open at $73.50. This negates the entire previous day’s price action and causes every investor who is still holding the stock long overnight from Monday to be “wrong”.

Experienced traders can make use of the RSI indicator and Fibonacci retracements in order to check whether the price drop is questionable and is likely to continue or not. A bull trap is the opposite of a “bear trap” which can fool traders into selling out too soon in the middle of a bull market. The FTSE 100 scores 5 bull traps, compared to 2 bear traps in the 1991 – 2000 bull market and none in 2003 – 2007. Using a stop loss will help you limit your loss if you fall into bull or bear traps. To get the most out of stop loss orders, you need to get accustomed to using them every time you trade.

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