It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Bullish flag formations are found in stocks with strong uptrends and are considered good continuation patterns. They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of consolidation.
But short sellers or bears, trap them in the key resistance levels and push the price even lower. The bull trap lures in buyers, creating a short-term rise in price. This eventually gives way to selling pressure and a falling price. “Although bull markets offer plenty of opportunities to make money, they don’t necessarily help you become a better trader,” Reid said. He recommended investors and traders develop a “bidirectional mentality” to help put them in a position to understand in both bull and bear markets. A pending resistance level may be found in the chart’s upper part. Because when price approaches the levels of resistance, the first candlestick smashes it. A bearish candlestick, on the other hand, follows it, indicating a turnaround. The Stop Loss Cluster indicator is an excellent tool to help you identify potential bull/bear traps.
Dont Get Caught in a Bull Trap
If you are not in control of your emotions, a quick 10% gain can cause a bit of an ego trip. In the flash of an eye, all of the worries wash away from you and your confidence begins to build. Then just as quickly as you feel you are in control of the situation, you wake up to a morning gap down or if you are day trading, the stock just plummets on high volume. People in disbelieve hold on to their trades that are suddenly turning into a loss. 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. 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. Candlestick patterns and formations are very important when seeking to identify potential market turning points.
The downward trend then reverses back upward, “trapping” the unsuspecting bear into a losing position. What causes a bear trap is not just the downward price movement but a drop in price below a key support level. The bearish investor or trader expects a break downward through a resistance level to be followed by further downward movement. Thus, they are “trapped” and lose money after the reversal in price back upward. Breakout trading profitability declined with the introduction of AI and particularly quantitative trading bots in recent years. Usually, these bots can easily see the depth of market orders and trap traders in main resistance levels which cause bull traps. 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. In the case of a potential bull trap, having a high RSI and overbought conditions means that there is mounting selling pressure. Traders are looking to take their profits and are likely to exit the trade soon.
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What I am saying is that once you have recognized you are in a trap , instead of panicking think through the next level down where a bounce could begin to reverse the trap. So you could be saying to yourself, well this trade worked out, but what if Zynga had tanked and you lose way more money. So, you go from double digits to a losing position in a matter of seconds. Well, throughout this article, I will provide one simple strategy to protect yourself from being caught in the trap – accepting the risks. At this point, you have just entered what I like to call the freeze phase. This is where you know you should sell, but are unable to because you believe the stock will come back. For the last 8 years, we have been providing a wide range of trading-related blog articles, trading guides, podcast episodes and tons of trading videos on Tradeciety.
- Some traders going to tell you there are bull trap patterns which you can easily identify them.
- Therefore, the trader thinks it’s a good time to place a buy order.
- The traders or the investors are forced to think that this is the best time to invest in an asset as the price will go up in no time.
- What is a The Support Level Broken Turned Resistance Level?
- This is to reduce mounting selling pressure and to re-enter at lower prices for better price positions.
However, it may be difficult to time your entry accurately. This may work best if you believe there will be a short squeeze or believe in holding the asset in the long term. If you believe that the cryptocurrency will rise in the long term, for example, you may have greater confidence in buying the asset during its dip. Alternatively, you may choose to trade the bull trap intentionally and profit from the price decline. For example, you can open a short position once the bull trap is in effect, either directly or with financial derivatives such as Contracts of Differences . A high RSI can be a warning signal of either a potential bull trap or bear trap.
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. A bull trap occurs when traders take a long position and then have price reverse and move lower very sharply. Read more about btc to.usd here. 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. They are then able to hold the security for the next uptrend. However, by understanding how bull traps form and what they mean, they can become profitable setups. In this post, we have seen how bull traps can be identified and even traded while minimizing the risks and maximizing the gains.
This false breakout can lure investors into buying stocks at elevated prices, only to see the market turn around and head lower. Bull traps can be difficult to identify in real-time, but there are a few key indicators that can help you spot one forming. For example, if the volume is declining as prices move higher, it may be an early sign that bullish momentum is waning. Similarly, if the rally is driven by a small number of stocks while the rest of the market lags behind, it could be a warning sign that a bull trap is forming. When spotting a potential bull trap, it’s important to exercise caution and wait for confirmation before making any investment decisions. A bull trap pattern occurs when there is a breakout, and the price has been consolidated. It is more clearly visible when traders trade based on technical analysis and chart patterns.
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If there is little or no increase in volume on the breakout, it’s a sign that there isn’t much interest in the security at that price and that the rally might not be sustainable. Weak buying volume is an indication that there isn’t much interest in the security at a specific low price and that the bulls aren’t strong enough to push the price higher. Let’s say you’re looking at a chart of an asset in a downtrend. After a while, the price reaches a point where it starts to consolidate sideways in what’s called a “range.” ● Eventually, the market went down a little, then back up to the resistance zone.
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This way, you can rake in some profit to offset the previously sustained losses. It is also possible that when the price crosses the resistance levels, investors who are already holding long positions may decide to cash out and close their positions. That’s because they are happy with the gains they already made. This increases the supply of the asset and creates selling pressure in the market. A bear trap pattern involves technical trading and is not a suitable strategy for long-term investors. A bear trap involves short selling of a stock or other investment security. However, a bear trap and short sale are not the same thing.
Risk of Trading a Bull Trap
This causes traders to open short positions with expectations of profiting from the asset’s price decline. Alternatively, it may cause them to sell off their stock or cryptocurrency assets, in order to take profits and prevent losses. However, the asset ends up continuing on its uptrend and the bears suffer losses or opportunity costs. Checking the trade volume of the affected asset can help you identify and avoid bull and bear traps. For example, when there is a reversal, there should be a noticeable increase in volume because many traders and trading orders are usually involved in the process. However, if you notice a reversal without a noticeable increase in volume, it is likely that the price change will not continue, which is just a trap. At the beginning of a bull trap, the crypto asset breaks through its resistance level and seems to be on an uptrend.
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. Many traders see this as a bullish reversal and start buying, thinking that the downtrend has ended. Unfortunately, this is usually just a temporary move, and the price soon resumes its downward trend, leading to heavy losses for those who bought at or near the top. When a bull trap is suspected, traders should exit the trade immediately or enter into a short position. Stop-loss orders can come in handy in these scenarios, especially if the market is moving swiftly, to avoid being swept away by emotions. Price action refers to the genuine behavior of the price at any given time. If this concept is worth respecting, then a trader should never attempt to take buy trades at resistance levels. There are exceptions, though, such as if the price re-tests the zone after breaking it and confirms the start of a fresh trend.
A bull trap is also known as a whipsaw pattern, and refers to a false signal where a value of cryptocurrency, or any other kind of financial asset, displays a sign of recovery or reversal after a downtrend when in reality, the asset is actually set to decline further.
— Juanito Bodoc (@bodoc_juanito) July 14, 2022
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. 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. In a nutshell, that is how a bull trap is safely traded for easy profits. The safest way to trade a bull trap is to accept that the trend has changed and flow with it. 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. It is easy to spot the start of the bull trap because the huge candle discussed above forms and closes outside this range. Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice.
These are known as “bull traps” because traders and investors who bought the breakout are “trapped” in the trade. Bull traps are false market signals that can take place on an asset, such as a cryptocurrency, that exhibits a strong long-term downward trend. In a bull trap, the price of an asset surpasses its previous support levels, enticing traders and long-term investors to open new long positions or purchase more of the asset. A bull trap is a pattern that can occur during an uptrend in the stock market. It occurs when the market rallies to a new high, only to reverse and fall back below the previous high.
A bull trap is a kind of chart pattern or you may also call a forex trading setup that traps buyers into thinking that the price is going to go up. I have been warning readers that upward breakouts in a primary down-trend are notoriously unreliable and feel I should back this up with some charts. The question facing us is whether the 2010 consolidation signals the start of a new bear market, or is merely a mid-point consolidation similar to the Dow in 2004. A bull trap chart pattern is an indication of a bearish signal. Look https://www.beaxy.com/exchange/eth-usd/ for whether the asset is currently overbought, which could indicate a bearish reversal from the prevailing bullish trend. You could also wait before opening long position following a breakout, to see if the bullish trend continues. A bull trap is a harmful pattern for traders, but you can use it in your favour. To do so, identify it ahead of time and avoid entering the market if there’s any sign of its formation. However, the technical indicators on the chart illustrate how this rebound is potentially a false recovery.