Bitcoin News

The Bull Trap Trading Strategy Guide

In these examples, I have highlighted my trades in penny stocks. While these charts will look crazy to traders of the S&P 100, the principles remain the same. I remember thinking, something must be wrong with my data feed. So, I went out to Google and typed in “CHTP quote” and again saw results of $2.50. 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. The easiest way to make the concept of ‘insurance’ work is by applying a moving average to your charts and only trade in the direction of it. Even popular and super successful market wizards like Marty Schwartz use this exact concept. 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.

This counter move produces a trap and often leads to sharp sell-offs. If you haven’t encountered a bull trap, then you don’t know about pain. After trading for 19 years, getting caught in a trap is one of the worst feelings in the world. As you will see, the bull trap and the squeeze patterns come in different forms and it pays off to understand the little nuances and dynamics that drive price. I explain all trap and squeeze patterns in our strategy course. 5) Price rallies further and the trapped short traders are now facing huge losses. Most are forced out of their long trades which means that they have to buy which accelerates the rally. 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.

Failure of The Wyckoff Spring Reversal Pattern

Traders face various challenges, including high volatility, unexpected events, wrong signals, risky assets and more. Ethereum eventually proved this was a bull trap pattern, as prices fell to retest the old low at $3,124. After that test failed, prices collapsed 40% in a short period — in this case, just a matter of hours. As the bull trap is sustained, prices tend to correct swiftly to the downside.

Even after you observe the retest, don’t place your orders right at the retest level. Wait for a candle or two to confirm that price is going your way before you get into the trade. For instance, let the price form one or two candles that suggest a downtrend after a retest that follows a breakout from a support level. Those who have shorted can become trapped in a losing trade and must purchase to exit. Those who sold might experience regret for selling and wishing to purchase again, driving the prices higher.

Doji : What Is a Doji Candle Pattern?

In order to prevent from a bull trap and big capital losses, you should use a proper position size and never open a position with your whole account capital at once. Putting a stop-loss order in these trades have a little more risk. Because stop-loss hunters usually know where a majority of traders put their stop losses. So they’ll usually cause the price to drop quickly and hit those stop losses.
bull trap pattern
I mean we are talking about a biotech stock and we know how these have made and lost millions for a lot of people. At the end of it all, I accepted the fact that the “market happened” and there is nothing I can do about it. So, with that in mind, I placed a mental stop loss at $1.68 and I was going to let the market move in its desired direction. My next real-life example is of the biotechnology company Chelsea Therapeutics . This was my first trade of the New Year, so you can only imagine the psychological importance. Not to mention I had just hit another peak in my trading account; you could say I was riding on a bit of a high. Immediately look to the left of the chart to identify key support areas. This will give you some indication of how far the stock can go against you. Tradeciety is run by Rolf and Moritz who have over 20+ years of combined experience in Forex, stocks and crypto trading. Trading is finding patterns Trading is all about finding patterns and being in tune with the rhythm of the markets.


The Stop Loss Cluster indicator shows you areas where many other traders trading your currency pair have put their stop losses. One of the ways to identify a potential bull trap or a bear trap is by calculating the relative strength index or the RSI of an asset. This technical indicator permits you to check if the cryptocurrency asset or the stock is underbought, overbought or neither. Nevertheless, there is an abrupt reversal against this uptrend. This results in the traders who had jumped in to incur losses as the crypto or the stock price declines rapidly. The traders are then compelled to exit the trade with losses or stay trapped in a long position.

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 . The lows of this zone ultimately held and the stock forged a Double Top Breakout on the next upturn. Keep price action in mind as you look to take your profits. Ideally, look for bearish candlesticks in this situation or extremely bearish looking bullish candlesticks.
A dead cat bounce may exhibit similar characteristics to a bull trap. Traders who find themselves trapped in the bull trap should exit the position as quickly as possible, losses notwithstanding. In some cases, short-term price appreciation can result in minor profit. In any case, it’s important to exit the position before the full extent of the reversal. Stop-loss orders are a smart approach here, and can help traders hang in for the duration of the rally before it falls back into a downtrend. A bear trap is a technical pattern that is observed when the price of a crypto asset shows a false reversal from an uptrend to a downtrend. In simple terms, they are fake price dips that a few traders often lead to misleading inexperienced traders into taking a short position.

When this occurs, bulls who jumped into a trade believing the equity would move higher are “trapped” on the losing side. A bear trap and a bull trap are similar in that they both involve a false signal indicating a break in a trend, followed by a reversal that returns back to the original trend. In both instances, the investor or trader incurs a short-term loss. Where bear traps and bull traps differ is that the direction of the trends and reversals are opposite.

An investor should search for a bull trap in a bullish market where the price is expected to move in an upward direction. An investor needs to monitor markets carefully to catch a turn in a trend. 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 can occur when the price of an asset rises above a resistance level​, luring in more buyers as they chase the upside breakout. The buying tends to be short-lived, though, and the price may tumble shortly after. It’s called a trap because those ‘bulls’ who bought in as the price was breaking out to new highs must exit or face mounting losses as the price reverses course and declines. Read more about ether to usd calculator here. Bull traps can be costly for those who get caught but potentially profitable for those who understand what is happening and use this knowledge to trade them.

Use The Volume Indicators

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.
Hence, these breakouts can be considered a false signal, one of the worst-case scenarios a trader can anticipate. Breakout points vary depending on time horizons and other factors. Traders who trade predominantly on technical levels will have a harder time to avoid bull traps than traders who also combine fundamentals in their analysis. In their early formation, bull traps do look like valid and powerful buying signals, especially to traders who trade upside and downside breakouts. Bull traps are false buying signals that “trap” investors and traders who acted based on those signals. A bull trap occurs when a downward trend in a stock or other investment security breaks upward and above a key resistance level. The break above the support level lures bullish investors into buying shares of the investment. The price reverses, causing the bullish investor to experience a price decline.
You’ll be better off trading bull traps during times of higher liquidity, such as during the NYSE open-market hours or the NY-London session overlap in the forex market. All attempts by the pair to break above the resistance level were short-lived. The breakouts lack confirmation, and not a single candlestick has managed to close above the resistance. This is a clear sign to avoid opening a buy order, at least until we see a clear upside breakout followed by a well-defined pullback to the broken resistance. Inexperienced traders can take this to mean that the bullish reversal is in effect and join in, only to be trapped when sellers re-enter the market. There are several ways a bull trap can occur, but they revolve around a false breakout.
bull trap pattern
MarketBeat empowers individual investors to make better trading decisions by providing real-time financial data and objective market analysis. Investors are always told to leave emotion out of their trading or investment decisions. However, there are times when confirmation bias sets in and we see what we want to see. The good news is that by taking a few simple steps, investors can protect themselves against the downside risk of a bull trap. To help with that, traders should set a firm stop-loss order just below the breakout level.
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. Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type. 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. After Build up with few red doji , i got a bullish candle closes previous high. For the first time, I now understand the Bull Trap trading strategy. You can also exit your trades at the nearest swing low, Support area, etc.

  • Alternatively, it might also cause them to sell off their crypto assets or stocks in the bid to receive profits and prevent the losses.
  • So if investors can confirm that the equity is trading around its average daily volume they can have more confidence that a genuine reversal is taking place.
  • In trading, a bull trap is a situation where a trader buys an asset believing its price will continue to rise, only to see it fall sharply after reaching a new high.
  • Moreover, the price rose again to pass that resistance area, but short sellers trap buyers there again.
  • In reality, the trend is expected to go lower, and the market continues to seek out cheaper pricing.
  • Investors and traders sell the stock thinking that the rally is over.

As the selling commences, the traders who have just invested might panic and sell. Try to stay up to date on those key fundamentals to determine whether an upside breakout could turn into a bull trap. Low volume usually occurs during times of low liquidity, meaning that there are probably not enough sellers to absorb the breakout until liquidity picks up again. One of the worst things about a bull trap is that you won’t immediately recognize that you’re in it until the damage is done. In which case, the only thing you can do is offload your shares to avoid incurring further losses.
If the setup fits your criteria, you’d be looking to sell which would be a counter trend position during a bull market. Then a short price recovery happened, and some traders thought this is the bottom. However, the price got rejected by bears and went even lower. So in order to do that, They pushed price a little bit higher to broke triangle resistance line and then trapped buyers with their big sell orders. A trade’s position size depends on your risk tolerance and market you’re trading on. As a general rule, it’s better not to risk over 2-5 % of your capital in one trade. E.g. in an ascending triangle chart pattern, there is a high probability that price would break the resistance line and go higher.

How do you know when a bull runs over?

Divergences are measured by the advance/decline line. This technical tool compares the number of rising stocks to the number of falling ones. If most shares are falling, yet the indexes are climbing higher, it signals the bull run is about to end.

A strong uptrend with minimal bearish interference means the buyers are pumping in everything they have. However, when they take the price to a certain resistance level, they tend to fear or respect it, and the price pulls back before going even higher. We analyzed British Pound/Dollar (GBP/USD) daily chart in the Forex market to describe different types of Rounded tops and bottoms signal the end up of an uptrend or downtrend, respectively. A rounded top occurs when the price ascent slows down, then starts moving sideways or makes very little progress to the upside, and then starts moving lower. A special type of stop-loss order you can consider setting to mitigate the risk of bull traps is the trailing stop order.

Therefore, it qualifies as the perfect bull trap formation. A range means that the price appears to bounce back and forth within a support and resistance level. 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. Woe unto them, a few candles later, the price makes a sudden and aggressive U-turn and a bearish move begins. Those with stop losses have them taken out as the rest are left holding onto losing trades. Thomas Dorsey’s Point & Figure Charting examines the basic ideas and key patterns of P&F charts. Dorsey keeps his analysis simple and straightforward; as a relative strength disciple, he devotes a complete chapter to relative strength concepts using P&F charts.

Price goes up, and when it reached the resistance level, it will break the resistance and move above it a little bit. Identify a resistance line on the chart by marking the top of a price range or recent swing highs. In the chart, the currency pair has entered a downtrend, which is shown by a series of lower swing lows and lower swing highs. But then the price moves above a prior swing high, drawing the downtrend into question. Those looking to buy may choose to jump in, but the rise quickly fails, and the downtrend continues. Below is another example of a bull trap in a EUR/USD chart. The price is above the prior high or resistance level only briefly. The price moves above a prior high point in price or above a resistance level. The trailing stop order moves along with the market price if it rises, trailing behind at the distance or number of points away as set. However, in the case that the market price falls, it will remain static.
However, the value will soon drop back to the starting point. The majority of traders feel this is just a brief halt before the marketplace continues its upward trend. The spike may not come, and you may be pulled out of the transaction, leading to a potential loss. It is a position for traders who don’t even understand how to identify a bull trap. This article walks us through the various bull trap chart trends. A bear is a trader or an investor in the financial markets that believes that the price of a security is likely to decline. Bears might also believe that the overall direction of a financial market might be in decline.

What is a bull trap and how does it work? – IG International

What is a bull trap and how does it work?.

Posted: Tue, 15 Sep 2020 08:33:56 GMT [source]

It tricks traders into thinking that the price of an asset is done declining. Therefore, the trader thinks it’s a good time to place a buy order. However, when the price soon resumes its decline, these traders lose money. A bull trap happens when the price of a security that has been in a downtrend makes a sudden and significant move higher. This action draws the attention of interested investors and traders who begin to buy shares of the stock.