What Is a Bull Trap In Trading, and How to Identify It

Pullback trading instead of breakout trading on EUR/USD Forex chartAs we showed in the above image, two bull traps happened before price could pass through resistance area. When a sudden bullish move breaks a resistance, it is better to wait for a retest and allow it to gain a bit of upper momentum before executing buy orders. Likewise, allow a sudden selling move to break the support, retest the resistance, and continue the bearish movement before entering a trade. The resistance was clear and once price started to break this level the bulls began to enter long trades. However, just as soon as price had broken higher, it snapped back lower, trapping the bulls in their long trades. A market situation that occurs when price decreases incites traders holding long positions to sell their ways out of their stock positions to avoid a dramatic loss. A bull squeeze is also known as a long squeeze or simply as a squeeze. In April 2021, Ethereum exhibited technical signals that suggested a low likelihood of a bear trap. As illustrated above, Ethereum avoided the bull trap and ended up with a breakout, rallying 83% in value. 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.

  • In other words, bull trap is a false trading signal which cause traders to open a long position close to resistance levels in hope for short term profit.
  • However, this subsequent move back up to USD8,200 had very little buy support, and price eventually broke downward back to USD6000.
  • The price of an asset goes up until it reaches a resistance level.
  • But after a few more days of gains, peaking on November 4th, the sellers soon returned and pushed the market to even lower lows.

Please read Characteristics and Risks of Standardized Options before investing in options. The S&P 500’s retreat from all-time highs in January 2022 suggests investors had witnessed a bull trap weeks before this article’s publication date. Three white soldiers is a bullish candlestick pattern that is used to predict the reversal of a downtrend. Swing high is a technical analysis term that refers to price or indicator peak. Swing highs are analyzed to show trend direction and strength. If the setup fits your criteria, you’d be looking to sell which would be a counter trend position during a bull market. The bears are not out of the woods yet though as ETH is still down 71.3% from its November all-time high and broader crypto markets are still largely consolidating. If you don’t know what a bull trap pattern or setup look like, I will show you here. Inflationary pressure may be lifting a bit, but the price we have to pay for that is slowing economic growth. Even worse, the Fed is not nearly done with its campaign of rate hikes.

Small Account Option Strategies

Bull and bear traps are false reversal signals that can make you lose a lot of money if not handled well. Just as quickly as price started the move out of the resistance level it begins to reverse and the bull is trapped in their long trade they really no longer want to be in. This trap is set up around key areas such as major moving averages and important resistance levels. As the first chart example shows below; these major support levels will regularly hold. To create the bear trap there is a level or area in the market that the trap will be created around. This can be an area such as a major moving average, but it is often a major support level. At DTTW, since we have direct market access, our traders are always able to see this volume in real time.
I sat at my desk and asked myself the very real question, “Are you prepared to lose this amount of money and more? 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. 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. From what I remember, I felt sick to my stomach on the morning of the gap down.

The price should break above the resistance at the second top and then turn around in the event of a bull trap. In both a bull trap and a classic double top pattern, the price is supposed to decline. If there’s a strong downtrend and the price rises within it, the risks of a bull trap increase significantly. Imagine that the price rises to break above the resistance.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading. Bear markets and steep, broad-based sell-offs are often followed by quick, sharp rallies. So how and when can investors know if price upswings are for real and have legs—or are just a mirage?. Read more about 1 eth to usd here. Football fans are surely familiar with the flea flicker and Statue of Liberty plays. Markets have their own versions of ruses (what football announcers might call “trickeration”). Dear boss Rayner, I just want to let you knw you are blessing that God sent to me and money can’t buy the knowledge you are sharing everyday. Bull trap is another way and even simple way of good technical analysis.

A Final Thought About Bull Traps

At the end of the day, it was just more bear market action, and it wasn’t pretty. A bull trap occurs when a steadily declining asset appears to reverse and go upward, but soon resumes its downward trend. Sellers let buyers dominate the market to enable the selling of limit orders above the resistance level. This particular bull trap tests the USD413.50 high twice before breaking support and causing the price to fall down to USD402. C shows a breakout to USD413 with a subsequent support test at D of a previous resistance level. It’s better to wait for confirmation and have a trading plan if you want to dodge bull traps. In fact, a bull trap can occur everywhere, but a dead cat bounce always happens during a downtrend. 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.

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. The bears were very interested in selling during the decline, causing huge volume spikes. The bulls are comparatively uninterested and are not aggressively buying shares. You want to see if price breaks that level and remain above that resistance level. Firstly, you can look for signs of confirmation such as higher trading volume, bullish candlestick patterns, and a low or neutral RSI, as mentioned above. Volume is another important indicator to look out for in both bull and bear traps. In such cases, the initial downtrend is not indicative of continuing price decreases as it is a temporary dip caused by profit-taking and institutional manipulations. Instead, the price will increase again once the institutions scoop the available assets. Thus, a high RSI can also be indicative of a potential bear trap.

Your results may differ materially from those expressed or utilized by Warrior Trading due to a number of factors. We do not track the typical results of our past or current customers. As a provider of educational courses, we do not have access to the personal trading accounts or brokerage statements of our customers. As a result, we have no reason to believe our customers perform better or worse than traders as a whole. Ross Cameron’s experience with trading is not typical, nor is the experience of traders featured in testimonials. Becoming an experienced trader takes hard work, dedication and a significant amount of time. There’s a much higher likelihood that a price increase unaccompanied by a significant rise is simply robots and retail traders fighting it out.

ZIM Integrated Stock: 20% Dividend And Undervalued (NYSE:ZIM) – Seeking Alpha

ZIM Integrated Stock: 20% Dividend And Undervalued (NYSE:ZIM).

Posted: Sun, 24 Jul 2022 09:09:00 GMT [source]

Yesterday I gained 300$ from shorting BNB, today I lost 535$, I don’t know anymore. I am just a nobody and you should not take anything I say/write into any consideration, as I am dumb as a tack. Bitcoin has been following and have not broken through this blue trend line since April. Right now we see a lot of Doji candles, and candles with long wicks, that tells me there is confusion in the market, and we are not sure where BTC could go. For me personally, thats 3 easy and simple indicators telling me… The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. , offers investment services and products, including Schwab brokerage accounts.

Caught in a Trap

Bitcoin isn’t the only cryptocurrency susceptible to a bull trap. The bull trap was present on a 4-hour price chart of Ethereum the same way, right before it collapsed on May 19, 2021. 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. As the market trends lower, it begins to trigger the stop losses placed by the long traders. Rate hikes and inflation will have its effect on the BTC so as on the ALTS. Hey guys , just found a good stock to talk about , HDFC BANK was moving in a great downtrend . ERs coming later likely to disappoint and guidance has hardly been rosy so far, can’t expect much imo. Stupid happy fool rally not getting much higher imo, just another bottomfishing bull trap.
bull trap trading
Not every candle will be larger, but you want to see the bullish candles larger than the bearish candles before going long. Also, the market was exhibiting range contraction , which is the opposite of a healthy rally. Lastly, RSI could not break above 50 , suggesting this rally could be a false recovery. My current belief is that we will nearly replicate said pattern ahead of making another leg lower in the stock market(many market-moving… This is a continuation of my last post, trap has been activated.

Upon testing it, it closed below it, meaning an uptrend was very unlikely, so the trader expected a sell trade. The first hint that a bull trap is on the way is a strong bullish trend that has been sustained for a long time, but it reacts significantly to a specific resistance zone. After this, the market slows down before more buyers jump in and try to push the price past the zone of resistance. This leads to the formation of a “breakout.” Unsuspecting buyers see this as a continuation of the uptrend and they execute more buy trades. The pattern is very tricky in that it might give “confirmation” of breaking past the resistance level. This makes any traders watching the price behavior believe that the bull rally is proceeding, so they execute buy traders. One of the most common trap trades known to traders is known as the bull trap. In this article, we are going to define a bull trap, see how to spot one, learn to avoid them, and then reveal some ways may be possible to profit by trading them. For long-term investors, a bull trap can be an opportunity to buy the security at a lower price as it falls back down after the rally.
bull trap trading
When traders’ interest in a coin is growing, the trading volume of this coin is growing, too, because traders start buying and selling it. A bull trap is a situation when a trader buys an asset whose price suddenly started growing in the hope to get a profit. However, after a short surge, the asset price drops again, and the trader loses his funds. Moving averages are key instruments that even amateur traders use widely when they want some help with analyzing a price chart. In this article, we’ll go through the basics of moving averages and then learn some life hacks that will help you to use this tool for boosting your trading results. At this point, price rises again at F, causing bullish traders to enter long positions after seeing support at USD409.50. Long investors intend to hold a stock for at least 12 months. And many bullish investors hang on to their positions for much longer.

However, when the downtrend looks like it’s about to continue, the bulls make a comeback and push the price back to its previous high. Many traders see this as a bullish reversal and start buying thinking that the downtrend is over. Unfortunately, this is usually just a temporary move and the price soon resumes its downtrend, leading to heavy https://www.beaxy.com/market/btc/ losses for those who buy at or near the top. Unfortunately, most retail investors, especially in the crypto space, expect that a breakout will always be followed by a stronger price rally, which isn’t always the case. A bull trap is a real pain in the neck as it causes substantial financial losses leaving the market participants penniless.
Using the American S&P 500, the market reached a high on 19 Feb, fell 34% and then has risen 28% . While the market has not fully recovered, there is a sentiment amongst some commentators that ‘the worst is over’. There is currently 13,089,105 ETH staked according to the Beacon Chain explorer. At current prices, this is worth around $18.3 billion and represents almost 11% of the total circulating supply. This entry was posted in Daily Analysis and tagged Indices, stocks.

Redfin Stock: Recent Momentum is Fundamentally a Bull Trap – TipRanks

Redfin Stock: Recent Momentum is Fundamentally a Bull Trap.

Posted: Wed, 20 Jul 2022 04:57:03 GMT [source]

However, developers have confirmed that it will not all be unlocked at the same time to ensure network security and consensus. According to CoinShares, institutional inflows have been reentering Ethereum-based products and funds while investors have been largely shorting Bitcoin. ETH is currently outperforming Bitcoin with a 3.6% gain on the day whereas BTC has dropped half a percent in a fall to $21,253 at the time of press. But this upward rally is shor- lived and at the end of the certain timeframe or period, price comes back down and closes close to where it opened at or below where it opened it . Have a look at the 4Hr technical analysis Technical points 1. We found real estate investment trusts with strong business models, and dividend yields above 6%. At the time of publication, DePorre had no position in any security mentioned. Binance is the biggest cryptocurrency exchange that offers a simple and smooth interface with a variety of features to users.
A breakout that is of low volume and also shows an indecisive candlestick could be a false breakout. The bear and bull trap are created by the major market players. Traders with short positions are taken out and trapped out of the market. When liquidity erodes at these levels, market price declines back and is within the resistance zone. There’s one basic lesson about trading stocks that you can draw from this examination of marketplace traps, and that’s the importance of avoiding rushed purchases and sales. So, follow the Crowd Strategy is good, but you need to be carefull.
That is how I my account got stoped out trying to trade breakouts. Ideally, look for bearish candlesticks in this situation or extremely bearish looking bullish candlesticks. Changes direction and head down and closes below the resistance level. The world of cryptocurrencies is a fascinating part of the investing universe these days. Questions abound about the future of the currencies themselves – Bitcoin, Ethereum etc. – and the use cases of the underlying blockchain technology. The perfect compliment to our Get Started Investing podcast series. Every week we’ll break down one key component of the world of finance to help you get started on your investing journey. This email is perfect for beginner investors or for those that want a refresher on some key investing terms and concepts.
However, when they reach a resistance level they’re unwilling or afraid to breach, the price will typically reverse before going even higher. When a stock experiences a sharp drop or gap-down with enormous red candles but then rebounds very gently, it’s an indication of a bull trap. A price rise without a significant increase may also probably be due to bots and retail traders jockeying for position. When the market is truly breaking out to the upside, there should be a noticeable increase in volume because more people are buying the security as it rallies higher. The value of an investment in stocks and shares can fall as well as rise, so you may get back less than you invested. Wait for the price to move above the resistance level or swing high. 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. Within this time frame, that pinnacle turned out to be the end of the diving board.