What Is A Bull Trap In Trading And How How To Stay Away

As the stop loss is triggered, more sellers are added to the market. This negative feedback loop generates strong downward momentum on prices, and the market moves very swiftly to the downside. Prices end up reversing lower as sellers overtake buyers, pushing the market down. When the market falls below the old low, the pattern is completed as the trader either stop the trade or is very deep in a floating loss . Bull trap patterns are often referred to as a “dead cat bounce.” They are commonly seen in all markets, especially in crypto markets, due to frequent swift recoveries.

Low liquidity in the market usually leads to higher volatility. When liquidity dries up, even a relatively small buying order could lead to large upside movements as there are not enough sellers to absorb the sudden spike in demand. As a result, a market could break above a resistance level but immediately reverse as liquidity picks up and sellers start joining the market again. A bull trap is a reversal against a bullish trend that forces traders to exit their positions as losses mount.

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 what is a bull trap in myself and was prepared for whatever the market had to bring my way. I never read the news, but sometimes desperation will push a trader to his limits. At the end of it all, I accepted the fact that the “market happened” and there is nothing I can do about it.

In other words, any push above the resistance should be taken with a grain of salt as it could lead to a bull trap. For long-term investors, in terms of portfolio construction, this time calls for more of a top-down approach than a bottom-up analysis. Expensive valuations shouldn’t deter investors from spotting opportunities. In this economic environment, the macroeconomic impact is much more relevant to shake the sentiment than at normal VIX and PE (Price-to-Earnings) levels. This content is not financial advice and it is not a recommendation to buy or sell any cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with cryptocurrency involves significant risks.

Discover what there is to know about bull traps, how to avoid them, and how to make money trading them. Finally, what is important to understand is that absolute greed has a place neither in the rising markets nor in the falling ones. Every investor, just like their investments, has to go through certain learning curves and cycles. Since this is a 4h swing trading chart, this support break can be interpreted as severe, causing bears to open short positions. C shows a breakout to USD413 with a subsequent support test at D of a previous resistance level. Now when you learned how to find the bull traps, we would like to suggest you several trading strategies. Underscoring the bearish view is a breakdown of my two “all-time high” stocks, Kforce and Kemper. From my experience, I know such reversals can confirm a trend shift. Therefore, they were my final confirmation of a possible bear market. Examples presented on Company’s website are for educational purposes only.

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No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Are prices breaking resistance trend lines and overhead levels of horizontal resistance? If these resistance levels break, then it is safer to go long. Also, identify the old swing low on the chart, and place a sell stop order should a breakout occur.

• This way, you can rake in some profit to offset the previously sustained losses.
• The stock you were just worried about begins to rally and not just rally but does so with price and volume.
• Day Trading is a high risk activity and can result in the loss of your entire investment.
• The keen buyers who know this phenomenon start closing their trades.
• IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority.

Learn more about bull traps including how to identify them and how to escape them, with examples, in this article. A bull trap denotes a reversal that forces market participants on the wrong side of price action to exit positions with unexpected losses. The opposite of a bull trap is a bear trap, which occurs when sellers fail to press a decline below a breakdown level. A bull trap is an investor who wants to profit from the movement of increasing prices. A bull trap is a false impression that the prices are increasing causing a bullish investor to try to take advantage of that.

These are known as “bull traps” because traders and investors who bought the breakout are “trapped” in the trade. The false signal will show the asset’s downtrend reversing its direction in expectation that trend will meet or breakout above the resistance level. During its sudden incline trend, investors or traders would often be lured to buy or open long on the asset, anticipating for the breakout. However, the trend reverses again after a short period of time and exposes that the value of the cryptocurrency/index is continuing to decline. Unfortunately for the bullish traders and investors, they are trapped in the trade and experience losses as a result. When you see the price advancing to the resistance level, you should wait and see what happens when it reaches it; 2. Then, place a stop loss at least 2 pips above the high of this candlestick; 4.

Understanding A Bull Trap

This way, your trade has room to breathe and you avoid getting stopped out on a “sudden spike”. You’ve learned how to avoid a Bull Trap and not get caught on the wrong side of the market. Because it tells you the buyers are willing to buy at higher prices . 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. When you “chase” a breakout, there’s no logical place for you to set a stop loss so you’re likely to get stopped out, even on a pullback. This means the price can easily reverse in the opposite direction (until it finds the nearest “floor”).

Why do short-term rallies often occur during bear market cycles and what do they look like? We explain the mechanics behind bull traps and give an example from 2008. 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. There are probably a dozen or more methods for trading bull traps, but in the spirit of keeping things simple, I have focused on the one thing that matters the most – DON’T PANIC. I would be re-missed if I just left you with a depressing article of how panicking cost me money.

But remember that technical indicators are just that—indicators—not guarantees that a price will move a certain way. Typically, with technical analysis, you don’t know for sure whether it’s a true reversal or a bull trap until after the fact. That’s why many chart watchers suggest charting multiple time frames to add context to your views. 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. But then it turns out it’s not a good time, because the price soon resumes its descent, catching buyers in a money-losing trap. In many ways, it’s the opposite of a “bear trap,” which can fool traders into selling out too soon in the midst of a bull market. Amazon’s stock is trading below the eight-day exponential moving average and the 21-day EMA, which is bearish, but the eight-day EMA is trending above the 21-day EMA. If Amazon’s stock was able to regain the $3,326 level it would also regain the two commonly followed EMAs as support and put the stock into a bullish position.

While the bull case remains technically unconfirmed at this stage, the bull-trap scenario will also remain unconfirmed for some time. The first few down days following the peak in January 2001 and the peak in May 2008 did not have anyone waving a big, white flag screaming the top is in. SPX remains below it, and I think it’s fair to say we’re no longer oversold. Chairman Jay Powell made sure of that on Jan. 4 and confirmed it this week. I submit that the counter rally is consistent with all of those factors. Indeed, as with counter rallies in the past, this rally remains below its broken trend line. All these events coinciding with a reversal in yields — check.

Bull and Bear Traps can sometimes fail and evolve into catapults – kind of like a double trap. A Bullish Catapult forms with a Triple Top Breakout, a pullback into the pattern and then a Double Top Breakout. A one-box Triple Top Breakout and a pullback into the pattern qualify as Bull Trap. Chartists should be careful because the Triple Top is a congestion area that represents a support zone. Traders should analyze whether the market is overbought which indicates a bearish reversal from the current bullish trend. The stock never breached its previous high, so it’s still technically range-bound. The timid rally failed firmly within the support zone established in October. One of the most common pitfalls of those who get stuck in bull traps is the lack of confirmation.

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I labeled each piece of evidence, which potentially would have tipped you off that this is a suboptimal long setup. That’s not to say that this stock might not recover, but it’s just not at all the ideal setup. As traders, we must put our capital to the highest and best use regarding both time and returns. This type of volume means giant holders are selling, and enormous positions take days to weeks to exit completely. Any considerable amount of selling would send this stock soaring below its previous lows. 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. As I scanned back through the chart I noticed a swing low at $2.02 and another one at a $1.68. For me, this would have represented a potential loss of ~37% and 48% respectively.

If the current high doesn’t breach the most recent high, it is either in a downtrend or in a range. The key here is the perception of a trend reversal, just enough to lure in the “buy the dip” crowd. When the price begins declining again, these bulls are forced to sell out of their positions, adding more fuel to the fire. I said to myself, “You are in a losing trade and it’s really bad. If you close the trade out here you will get the immediate relief of exiting the position, but remember what happened with Zynga”. So instead of panicking, I looked at the chart to see the next support level down. Whether you are a professional or a new trader, you can practice the following habits to avoid falling into the bull or bear traps. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.

★ Shorter candlesticks start forming when the price touches a resistance zone. At this time, there is neither volume nor momentum to support trading. In this example, a doji, which shows indecision, formed at the resistance level being watched. From this, we can translate the occurrence and say that the doji represents a fierce fight between buyers and sellers. Thereafter, a strong bearish candle formed, meaning that the buyers had lost and the sellers were now fully in charge.