What Is A Bull Trap In Trading And How To Avoid It

Tyler_Foster December 29, 2021 0 Comments

A breakdown below the previous swing low continues a series of lower highs and lower lows, which is the definition of a downtrend. A stop-loss order will automatically exit a position if it loses too much value. We share over 20+ years of combined experience in Forex trading. The advice is simple, don’t trade if it’s too good to be true – an uptrend cannot continue forever. Through this, you avoid letting your emotions dictate how you trade. As mentioned above, these are colloquially known as ‘Bull Traps’, as the investor who purchased the breakout is trapped in the deal.

what is a bull trap

If you look closer at the previous price-action, you can notice multiple retests of the resistance level. This is the first sign that buyers don’t have enough power to break above that resistance, and that any upside breakout could actually prove to be a fake breakout or bull trap. If the pullback fails to find support at the previously broken resistance level, chances are that we’re dealing with a bull trap. To understand a candlestick chart, it is essential to understand three elements- the body, the what is a bull trap wick and the colour. The body shows the range between the opening and closing price for the trading period. The wick is indicative of the highest and lowest price in the period. The green or red colour is indicative of price increase or decrease, respectively. Another meaning for a bull trap is an “upthrust” and that term was coined by Richard Wyckoff. This is a chart pattern that I use quite regularly along with its cousin the bear trap when looking for trapped tradersand to profit from their actions.

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Join ZINGERNATION on “Power Hour”, as we work hard to deliver trade ideas every day. The popular trader @Cryptocapo_ told his 25k Twitter followers that he’s ready to short BTC. Also… Binance Futures ALTs that were performing well are looking kinda heavy,” he added. XRP is trading for $0.61 per coin and is up 0.39% on Sunday morning. Still, XRP commands a $28 billion market capitalization and is up 39% during the last seven days.

Trend trading is a style of trading that attempts to capture gains when the price of an asset is moving in a sustained direction called a trend. “It was a monster rally to start the week off, some of that was reflected in value stocks — I think that is a sign people are prepared to be risk on. But value stocks did pullback on Wednesday, perhaps indicating that the market isn’t being as bought as people think on the surface,” Carlisle points out. Nevertheless, investors need to be mindful that the Fed cannot completely save a market off its April record highs. Progress must be made by the Trump administration on trade and fast, or the trapped bulls could be slaughtered. On Thursday, bulls bought the dip, and Amazon’s stock was able to muster a $36 move north. A loss of follow-through momentum had Amazon trading flat on Friday. A situation in which a declining stock, commodity, market, etc., misleadingly appears to have recovered, which encourages investors into buying it and quickly incurring losses. Bitcoin cash holds the fifth-largest market cap below the stablecoin tether and is currently trading for $281 per unit.

What Is Bull Trap?

83% of retail investor accounts lose money when trading CFDs with this provider. Trading such products is risky and you may lose all of your invested capital. If the price tests the resistance several times in the strong upward trend, it might be an indication of price reversal happening soon. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Placing stop-losses is the best strategy in such circumstances to avoid losses. Schwab does not recommend the use of technical analysis as a sole means of investment research.

  • As a matter of fact, some of the largest up days in history have occurred in during bear market cycles.
  • A breakout that generates low volume and indecisive candlesticks—such as a doji star—could be a sign of a bull trap.
  • The breakouts lack confirmation, and not a single candlestick has managed to close above the resistance.
  • However, traders who also follow market fundamentals may know in advance that an upside rally in certain markets doesn’t make any sense.
  • The opposite holds true for Bear Traps, which can evolve into Bearish Catapults.
  • Whether you’re retail or experienced traders, in this guide you will uncover the ins and outs of a bull trap.

Lack of volume around buy signals means nobody else is interested. The move will likely fail, and you’ll be caught in a bull trap. In this post, I’ll explain what a bull trap is and what to do if you’re caught in one. Plus, I’ll give you some tips to help you spot them so you can avoid this frustrating trader trap. Once the bull trap is released, the price usually resumes its downtrend. The gullible and/or amateur traders who fall into the bull trap will oftengo long, thinking price will rise further. Bullish traders think the recent price action signals that a downtrend has ended when it actually has NOT.

One of the meanings for “range” refers to the size of each candle. If the chart is a daily candlestick, then each candle represents that day’s range. Given this challenge, we can identify signals through technical analysis and chart reading, which will alert us to the potential development of a bull trap. Whether you’re retail or experienced traders, in this guide you will uncover the ins and outs of a bull trap. You’ll learn to hedge funds by avoiding these traps, based on an asset’s past performance, and by identifying them on a price chart. While the crypto market has its playbook of trickery, today we will share a page out of the book called the bull trap. This pattern traps traders into buying while the market is still trending lower. And if you’re caught in this trap, the consequences can be quite severe. There is always someone else on the other side of your trade and, thus, you should think twice who is buying from you and why do they want your trade.

what is a bull trap

That’s another sign the stock couldn’t follow through with its upward momentum. For me, breakouts work best on stocks that are recent runners with a ton of volume and, ideally, a catalyst. You think you see a perfect buy signal, like a stock breaking out or bouncing, so you buy. Then the stock quickly reverses and heads in the other direction. 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”. Large traders will buy large amounts in order to artificially drive the price upward to create a “false bull market”. Traders continue to sell limit short is triggered while the price continues hitting their stops. 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.

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. Also, many of them open short positions to compensate for their losses and cause the price to go lower. Price goes up, and when it reached the resistance level, it will break the resistance and move above it a little bit. As earlier mentioned, if you need to buy at a resistance level, wait until the price comes down to retest it then open a buy order. There is no fixed rule that buying at resistance-zones-turned-support is wrong. Traders know that a support zone, when broken, becomes a resistance zone. In the same way, a resistance zone, when broken, becomes support. From the descriptions of a bull trap, a long sustained uptrend is usually a potential sign of this cunning pattern.

Following the short squeeze, bears are forced to sell off their positions to minimize losses or prevent liquidation. From my 50+ year personal/professional investment experience, I developed the skills I use to find opportunities and avoid risks. Because markets are ever changing, I choose the strategies that conditions warrant. When a stock breaks out, it is essential not to see the move in isolation. It is a positive sign only if either the economy is on an upward growth path.

This represented a loss of over 20% and a ~30% swing down from the previous days’ closing price. This is a fair point of view; however, back to what we discussed earlier in this article, had I looked back a few months I would have noticed the last swing low on ZNGA was $2.50. While this would have been a larger loss than me closing my position at $2.88, it just proves my point that I was not willing to accept the risk. In the flash of an eye, all of the worries wash away from you and your confidence begins to build.

Once you are done with all the checks, go to the preferred trading platform, and start trading. I accept FBS Agreement conditions and Privacy policy and accept all risks inherent with trading operations on the world financial markets. Also, when a stock breaks out, it is safer to wait and watch for the prices to settle and sustain with justifiable volumes. In addition, being hawk-eyed about the key ratios and conducting technical and fundamental valuation, too, is useful. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. You understand and acknowledge that there is a very high degree of risk involved in trading securities. Contrary to the rest of the market, we see the next break down as the Beginning of a lasting bear market and not just a correction. On Thursday, data coming out of the US showed that inflation gauges gained momentum, surpassing all market expectations.

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