Find out how these technical patterns occur and how investors can prevent themselves from getting lured into the trap. When a position turns out to be a losing trade, some traders can make emotional trading decisions that move prices sharply. This phenomenon is known as ‘trapped traders’ and can be used to profit in some circumstances. First, there is often a desire on the part of buyers to enter a trade at the first sign of a price rise.

As shown by J, bulls may choose to enter into long positions with the hope of a further rise past USD8,500. Before the first downward leg of the slump in early January 2022, SPX was at a level of 4,800. Despite significant volatility along the way, the index fought its way up from the 4,100 level near late February to around 4,650 by the start of April. The way this works is that you set the trailing stop order at a certain percentage level or number of points away from the current market price. Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California life, accident, and health insurance licensed agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans.

I love a strong trend thanks to your books, this specific email will help a lot. An EA won’t help you if you don’t have proper risk management. I’d like to look for a buildup first to form prior to the breakout. But if it shows signs of strength by closing above the previous candle high, I exit the trade. The Bull Trap pattern requires you to go short against strong momentum. Because it tells you the buyers are willing to buy at higher prices .

It only takes a few hours of cryptocurrency market observation to recognize that market volatility there is typically much higher than on stock markets. They might sell as a result of this in anticipation of a market that will continue to be bearish . A popular technical indicator to identify overbought assets is the relative strength index . While it may be more of a novelty for most traders to think about, the most expensive stocks in the world are… As I scanned back through the chart I noticed a swing low at $2.02 and another one at a $1.68.

The Bear Trap in Trading: Trade or Avoid?

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. We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders.

The price quickly falls, creating a bull trap and the downtrend resumes. Price action​ is simply the manifestation of people’s bullish and bearish actions. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

How to Identify and Avoid Potential Bull or Bear Traps

And instead, prices soon start to drop right in front of your face. Checking out public opinion and news is another good way of identifying a bear trap. At that point, the institutional traders who set the trap will sell at the now higher price and will release the “trap”. But lo and behold, it turns out it is NOT a great time, because the price soon reverses direction, catching buyers in a money-losing trap. Equal highs in a down-trend are a strong bear signal; and are followed by a long downward spike. Go short when price falls back below the resistance level.

One approach to avoid bear traps is to stay away from illiquid markets. Although it’s not easy to identify a bear trap, it is possible. In the previous parts, we listed many ways to do that, so be careful and learn how to determine the bear trap. The account provides risk-free access to different markets and a whole range of tools that should be used to identify a bear trap. To understand whether the downward movement is strong enough to continue, you should check the volume, which reflects the bears’ strength. A bear trap can trigger dramatic losses, but we’re here to help you minimise risks while trading.

As futures rallied back towards $4300, bulls hoping for a push higher were trapped in long positions. Futures fell back towards and past amarkets login the recent low, making another low near $4060. Have you ever bought a futures contract in hopes of a breakout that never materialized?

How to Trade Bull Traps?

A bull trap fools some traders into thinking a market is done falling and that it’s a great time to buy. Bear in mind that valid signals delivered gains from 30% (Dow/FTSE 200) to 500% (Nasdaq/Shanghai) in the past two decades. The optimal filter could be as low as 2 or 3 boxes, provided you are able to restrict your losses when the bull or bear trap springs shut. We all know this when we click that “sell short” button on our brokerage platforms, so plan ahead. Aside from setting a stop loss, we need to have a rational risk per trade.

Hi Rainer, I read Price action trading secrets, your book. Your teachings are very easy to understand, your methodology is fantastic and is, all, practical stuff not pure theory. Today’s bull and bear traps excellent and is like a contrarian way of trading. As expected, the divergence led to a complete breakdown to USD402. In this scenario, a trader using only candlestick action to enter a trade would have fallen into a bull trap. Bear and bull traps are often preceded by significant RSI divergence.

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After it was all said and done, I elected to accept the risk. Good thing for me because the stock gapped up and I was able to make a quick 50% in less than a week. Now, I know this is not ideal, and I rarely find myself in this type of situation. The point is that when I did find myself in a jam, I did not panic. I believed in myself and was prepared for whatever the market had to bring my way.

For a Bear Trap to be possible, this breakdown can only be one-box. Breakdowns that move two or more boxes below support do not qualify. The Bear Trap occurs when prices reverse after a one-box breakdown and the subsequent X-Column moves at least three boxes higher. A one-box breakdown is vulnerable to whipsaw and the immediate reversal shows renewed buying pressure. Bull markets can lead to bad habitsfor investors and traders, according to Dr. Kenneth Reid, founder of DayTradingPsychology.com. These habits may not be harmful as long as bull conditions last, but they can have major negative implications when a bear market returns.

The last characteristic of a bull trap setup is that it forms a range-like pattern on the resistance level. The volume or technical indicators mentioned can be used to try and identify a bear trap first. There are a few kinds of stop-losses to choose from, including standard, trailing or guaranteed. Below is an example of a bull trap that takes place in the stock Honeywell over a two day period. HON broke out on the close of 9/6, only to gap down and break the low of the preceding range on 9/7. The volume indicator is one of the best tools that can signal a bear trap.

What is a bull trap?

The stock rallied off the lows and closed near its opening price. If not, close the trade and wait for the next opportunity. If you don’t lose all of your chips, you can continue playing another day, Spreadex Overview which is the most important thing. 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.

From basic trading terms to trading jargon, you can find the explanation for a long list of trading terms here. If you do not agree with any term or provision of our Terms and Conditions you should not use our Site, Services, Content or Information. Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions. These are the types of situations that turn a 2% account hit into a 10% account hit.

Additionally, the same novice traders will now be compelled to buy back the stock they have just sold out of FOMO. As the involved asset starts to see more demand, the prices will rise, allowing experienced traders to reap profits. 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.

He is especially interested in FinTech and writes about cryptocurrency, non-fungible tokens , and blockchain. These chart patterns, and more, are covered in our guide to the 11 most essential stock chart patterns. Use our product library to pull up charts of assets and find one that is in a downtreUse our product library to pull up charts of assets and find one that is in a downtrend.

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 bitit exchange review have made and lost millions for a lot of people. I never read the news, but sometimes desperation will push a trader to his limits. I couldn’t believe I was caught in yet another bear trap similar to Znyga, but also that my losses were far greater. I would be re-missed if I just left you with a depressing article of how panicking cost me money.

What Are Cryptocurrency Bear Traps and Bull Traps? How Do I Avoid Them?

To my grim surprise, CHTP in fact was trading in the $2.50s. This represented a loss of over 20% and a ~30% swing down from the previous days’ closing price. I was planning on closing half of the position on a morning pop; however, the market had other plans. I remember sitting at my desk doing my pre-market scan of open positions and seeing a trade come through at $2.50. From what I remember, I felt sick to my stomach on the morning of the gap down. It wasn’t just that I was in a losing position, but I also have the rule to avoid stocks right before their earnings.

● He did not execute the sell trade immediately but waited for a retest as confirmation. Look at the following image and see how a range forms before the trap. The information in this site does not contain investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Stay on top of upcoming market-moving events with our customisable economic calendar.

A high RSI might be an indication of a potential bull or bear trap. Also referred to as “dead cat bounce,” bull traps are often seen in crypto due to speedy recoveries. That is how I my account got stoped out trying to trade breakouts. It can be wise to always use a stop loss order to build potential losses into your trading strategy and minimize emotional turmoil.