What is a Bull Trap & How Do I Avoid It?

You as a trader ought to keep your eyes wide open for profit opportunities in such carnage. I’ll show you how to capitalize on such opportunities later. The difference between the two is that bull traps put traders into losing long positions while bear straps put traders in short positions. Indicators you can use to confirm this include the Relative Strength Index, Average True Range, Bollinger Bands, and Moving Averages, among others. It often occurs in Futures, Stock markets, Forex and Currency pairs. Some experienced traders use the chart pattern and technical analysis to look for trapped traders and try to benefit from the scenario.

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. For example, if the RSI has a hard time moving above the 50 centerline reading, this is indicative that a market shows indecision and is not yet recovering. Without momentum in the market, RSI readings will remain below 50. This behavior suggests the mood of the market is still to the downside, and the door is open to a bull trap. However, the problem escalates for the buyer, whose trade begins to float at a small loss. The problem intensifies for the buyer as the market pricing keeps readjusting to lower levels.

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Big players are intentionally pushing the price higher to entice unsuspicious buyers. As of the 6th of January 2021, cryptocurrency instruments are not available to retail clients in the UK. Trading is subject to high volatility caused by unexpected events like political events or natural disasters that may lead to rearrangements of market forces. Libertex MetaTrader 5 trading platform The latest version of MetaTrader. Research & market reviews new Get trading insights from our analytical reports and premium market reviews. A stop order will not guarantee an execution at or near the activation price.

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. This causes the asset’s prices to rise due to an increase in demand. You can trade a bull trap by opening a short position when you identify that a bear trap is in effect. These enable you to take a position on an asset without having to directly own it, making them well-suited to shorting. It’s hard to identify a bull trap because normally after a breakout, an asset would be likely to increase in price, not reverse. However, what you can do is carry out technical analysis and fundamental analysis on the asset you want to trade. Bull traps often happen around previous highs where it looks as if the price is continuing the rally. Especially amateur traders often tend to enter too early around such key levels . It’s especially dangerous if price rallies for a bit in their favor ad the trapped traders feel too comfortable and too attached to their trade.

How to Identify a Bear Trap

This range might not be perfect, especially on the upper side, because the market might still be making smaller higher highs. However, after the price reached the marked resistance level, it would slow down and pull back a little before pushing higher. As we can see, there were three tests before the bear trap eventually happened. A bull trap is most likely to occur after a long bullish trend. This is a sustained upward movement of the price that has been active for a long time. The price of an asset is said to bounce back and forth amid a support and resistance level when it fluctuates within a range. During this time, the bulls and bears are locked in battle as they try to push the price in opposite directions. The bears are trying to push the price down to new lows while the bulls are fighting to keep the price up. The idea of the Buy Stop pending order is to open a trade when the price breaks above a certain level and keeps growing. Place the Buy Stop above the resistance level to be sure the price will increase.
In this Gold chart, we see the bull trap forming on a resistance level. The price came in for the second attempt at the zone and successfully broke past it. The impatient and/or uninformed traders most likely interpreted this as a continuation of the bullish rally and went long. For day traders, a bull trap can be an opportunity to short the security as it rallies back up to the previous high. The price will then resume its downtrend, leading to profits for the trader. As with a lot of things in trading, identifying a bull trap can be difficult. However, the best way to avoid bull traps is to notice warning signs in advance—such as low volume breakouts. And understanding candlestick momentum so that you can be able to see the sell signals they generate when you see a potential for bull trap forming on the resistance levels. That’s why the best way to trade is to look for short selling opportunities and place stop-loss orders to minimize the losses. Here,the blue circle represents the false break taking place.

All the same, it is riskier to take buy trades at resistance level than buying at support zones. Experienced traders understand that this is the ultimate test of the continuation of a trend after breaching a major support or resistance zone. Similarly, they are very useful in identifying and completing the bull trap formation. When an engulfing pattern forms after the classic bull trap pattern has formed, then it is a straightforward indicator that a strong bearish move is about to happen. The last characteristic of a bull trap setup is that it forms a range-like pattern on the resistance level. The final feature of a bull trap arrangement is that it creates a range-like pattern on the resistance level. The first indication of an approaching bull trap is a powerful bullish momentum maintained for a long time, but which reacts swiftly to a particular resistance zone. Bull traps are used by both day traders and long-term investors to take advantage of unsuspecting market participants. However, the opposite happens, and you find yourself trapped in a losing position.

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

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

Posted: Sun, 03 Jul 2022 07:00:00 GMT [source]

You have a logical place to set your stop loss (below the low of the build-up), and this offers a more favorable risk to reward. This means the price can easily reverse in the opposite direction (until it finds the nearest “floor”). Because when the price has exploded higher, there’s no “floor” to hold these higher prices. The market does a 180-degree reversal and BOOM, you got stopped out — now you’re sitting in a sea of red. Rayner Teo is an independent trader, ex-prop trader, and founder of TradingwithRayner. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Those with stop losses have them taken out as the rest are left holding onto losing trades. Sellers intentionally let the buyers dominate the market for a short period, allowing sell limit orders above the resistance zone to be accepted. When a stock has established itself as a strong uptrend with little bearish pressure, it implies that buyers are flooding in all of their resources. Although some traders may be disappointed by this, most are better off waiting for confirmation and buying at a higher price than attempting to “get in early” and be trapped. When it reaches the top of a cycle, it is generally a period of consolidation as the bulls and bears battle it out for control. A high RSI might be an indication of a potential bull or bear trap.

Morgan Stanley Suggests Buying El Salvador Bonds Pummelled by Bitcoin Market Crash

An investor needs to be careful to identify a major trend change in the market. A long sell-off where traders miss profit opportunities and become greedy in search of more profits. In addition to a buy stop, another popular type of a limit order is known as sell stop. In it, you direct a broker to short a company below the price. This means that the short trade will be initiated only when the price drops below this level. Read more about eth to uds here. With those definitions in mind, let’s examine the two types of day trading traps. First, Ethereum did not break the downtrend, as the price was below the trend line .
bull trap trading
The bull trap is the trap that will catch out bulls looking for price to continue higher, often with breakout trades. Just as quickly as price started the move out of the support level it begins to reverse and the bear is trapped in their short trade they no longer want to be in. Have you ever entered a trade only for price to quickly snap back in the other direction? A bull trap is not just a pattern, but it helps explain how the average trader approaches the markets and why the professionals usually win. Price sets up a new uptrend that attracts investors to enter new positions. In other words, price starts a new trend wave by breaking the previous lows. The market price is moving in an upward direction, after which the resistance level is reached, price further breaks out and then it continues to move in the same direction. A bear squeeze is a situation where sellers are forced to cover their positions as prices suddenly ratchet higher, adding to the burgeoning bullish momentum. It can be challenging to wait patiently for some of these indicators to flash positive signals.

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 https://www.beaxy.com/market/btc/ of investment research. Bullish investors may be trapped by this brief increase in price, buying more shares only for them to drop even further in price. After reaching a price of $30, XYZ again begins to gain value, rising to $35. During this time, investors begin purchasing shares, expecting XYZ to return to its previous highs.

  • However, the RSI chart tells a completely different story.
  • One day, I will have the opportunity of meeting you and telling you how much you have helped me in my financial freedom journey.
  • Today’s article explores what bull traps are, how they are different from bear traps, and ways to recognize them, along with examples and some tips for avoiding them.
  • Further, some of the breakout traders panic and close their long positions.

We are very thankful to you for helping people like us because of we are able to learn and earn in the market. 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. You can also exit your trades at the nearest swing low, Support area, etc. Well, what I’d like to do is trail my stop loss on the previous candle high. This way, your trade has room to breathe and you avoid getting stopped out on a “sudden spike”. When the price forms a build-up at Resistance, it’s a sign of strength.

Therefore, crypto traders may anticipate a bounce and buy tokens too early, leading to large losses and frustration. Some popular indicators of a bull trap include low trade volume and failure for a stock’s price to rise above its moving averages. I wish I could but sometimes I do get caught out and that’s the way its going to be as long as forex trading still exists. So really, bull traps will happen if you like them or not. One way to identify a potential bull or bear trap is by calculating the relative strength index of the asset. This technical indicator allows you to check if the stock or cryptocurrency asset is overbought, underbought, or neither. Bear traps can be intentionally created by institutions that push prices down. This pressures traders and investors into selling the asset.
bull trap trading
To exit a long position requires selling, so this selling pressure will cause the price to fall even further. 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. For new and inexperienced traders, this is the hardest concept to follow and principle to internalize but it will make a huge difference in your trading. Never sell while price is going up and don’t buy when price is doing down. Only sell when price is already going down and only buy when price is going up. 3) Price goes a little in the favor of those ‘trapped’ traders, creating a feeling of confidence and security.

A bull trap usually has technical elements involved, such as the price moving above a prior resistance level. A dead cat bounce may exhibit similar characteristics to a bull trap. The price of the asset may experience a short-term decline, dropping below a support level, enticing people to sell existing long positions or take short positions. If there are not enough sellers to keep the downward momentum going, buyers may step in and drive the price higher. To identify a bull trap, traders could watch for a bearish candlestick chart pattern​ just above the resistance area. A bearish candlestick pattern could indicate that buying momentum has slowed, and selling pressure is coming in. For example, the ‘shooting star’ candlestick pattern helped set the stage for the price decline on the EUR/USD chart. A bull trap fools some traders into thinking a market or an individual stock price is done falling and that it’s a good time to buy.

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