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

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. What mostly tends to happen in a bull trap situation is that you may have bought a breakout of a resistance level thinking that price was going to go up. To effectively avoid the negative impact that bear and bull traps can have on your trading balance, we recommend that you use a combination of the methods described above. A bull trap occurs when a steadily declining asset appears to reverse and go upward, but soon resumes its downward trend. A bull trap chart pattern is an indication of a bearish signal.

He suggested adding a volume function to a daily stock price chart to see how recent trading compares over the past year or so. 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. Swing high is a technical analysis term that refers to price or indicator peak. Swing highs are analyzed to show trend direction and strength. This, ladies and gentlemen is the fakey in action.In this instance it’s a bearish setup with inside bars forming just in front of the mother bars. You just need to keep your eyes open for those opportunities. I’m not going to elaborate too much except to say that the fakey pattern is triggered by a false break of an inside bar setup. Once you have the inside bar setup, watch the inside bar and the mother bar start a false break. If you want to catch up on the fakey pattern, go to myHow To Trade Fakey Pattern post. Many traders consider the hack and retest method to be a reliable trading method.

What Is A Bull Trap In Forex Trading? 5 TIPS TO AVOID IT

Determine significant support and resistance levels with the help of pivot points. Triangle patterns may occur when the price of an asset moves within a smaller price area over time. The price spikes above the resistance line, which may attract buyers who are hoping this is the end of the downtrend. The price quickly falls, creating a bull trap and the downtrend resumes. A bull trap occurs when a security falls in price and then experiences a brief spike in value.

This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk.

What Is A Bull Trap?

But there are alternatives to short selling, such as put options, or ways to avoid certain situations, such as low trading volume, when bear traps are more likely to occur. A bear trap involves short selling of a stock or other investment security. A decline in price triggers a bearish investor into a short sale, which can make the investor money if the price continues to fall. However, the quick reversal back up in price causes the short seller to lose money. A temporary rise in prices may also force some short sellers to buy back shares to protect their profits, leading to even more buying. Another common cause of bull traps is a false breakout from a consolidation pattern. The price breaks out of a range to the upside, but then quickly falls back down and resumes its downtrend. As with a lot of things in trading, identifying a bull trap can be difficult.

It will help to avoid significant losses and even benefit from short-time price surges. That’s why the best way to trade is to look for short selling opportunities and place stop-loss orders to minimize the losses. A bull trap is a type of false signal that occurs in a market where prices are rising. A bull trap can occur during an uptrend or downtrend, but it is most often seen during an uptrend.

Two Type Of Day Trading Traps

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. It could be a bull trap following eight months of down trending. It would be great to retest them before buying orders while on the upper momentum. However, using different technical tools to confirm trade entries will help you reduce losses. Traders will use the knowledge which they have learned over countless years to identify patterns in the graph and short the stock in accordance with the patterns. Investors need to mitigate their risks and the longer an uptrend has travelled, the increased likelihood that a trap will form. As mentioned above, these are colloquially known as ‘Bull Traps’, as the investor who purchased the breakout is trapped in the deal.

It is a sign that this price increase might be nothing more than a bull trap after which the coin value will drop to its previous level. Valid breakouts are usually followed by strong upside movements and large trading volume. If the market forms a strong bullish candlestick right after the breakout, the breakout could be real and the market could continue to trade higher. Traders who are bearish on upside breakouts base their trading decisions mostly on market fundamentals, which is an effective way to avoid a bull trap. The opposite holds true for Bear Traps, which can evolve into Bearish Catapults.

These traps are crypto market manipulations carried out by traders holding large quantities of a cryptocurrency. Bear traders that took that one, are now trapped and getting losses. Read more about ethereum price usd calculator here. 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. For new and inexperienced traders, this is the hardest concept to follow and principle to internalize but it will make a huge difference in your trading. Never sell while price is going up and don’t buy when price is doing down.

Below, we’ll cover everything you need to know about bull traps. This will help you to lock in as much profit as possible, while also cutting losses early on into a bull trap. Sellers intentionally let the buyers dominate the market for a short period, allowing sell limit orders above the resistance zone to be accepted. Although some traders may be disappointed by this, most are better off waiting for confirmation and buying at a higher price than attempting to “get in early” and be trapped. 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.”

The breakout candlestick is a huge long green very bullish candlesticks and you are in profit and you start to think that “life is good”. 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. A bull trap is often characterized by an initial downtrend, i.e., a decline in https://www.beaxy.com/buy-sell/neo-btc/ price, followed by a false rebound, which is usually weak. The rebound is then followed by a continued fall in price that forms a new low. The collective selling or buying of a particular token affects the price, temporarily causing it to move in an opposite direction. During this short move, some investors who believe the market is already changing direction will be forced to respond to the market’s move and thus get trapped. As the price rallies, trapped short traders face huge losses on their position.

Likewise, allow a sudden sell-off to break the support, retest the resistance, and continue the downward movement before entering a trade. Warning signs can consist of various behaviours in the market such as low volume breakouts – if this is the case then it is best to exit the trade as soon as practically possible. Although many breakouts are succeeded by strong moves higher, the stock many times quickly reverses its direction. You may have heard the term bull run in stocks, but how can you identify one? A bull in trading means rising prices and equally applies to bull Forex conditions. Sellers let buyers dominate the market to enable the selling of limit orders above the resistance level.

Many of these attempted moves higher may fail because there is little overall buying pressure to begin with. As the number of buyers dwindles, the price may push slightly above a prior high point – the trap – only to fall sharply because sellers are becoming more dominant. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Bullish investors may be trapped by this brief increase in price, buying more shares only for them to drop even further in price. Once the price of a stock rises beyond a certain point, investors who held shares through the downturn may decide they want to offload shares while they have an opportunity to do so. This increases the supply of shares compared to demand and leads to the return of the downward trend. Bull traps occur for many reasons and it can often be hard to pinpoint just one reason why a bull trap occurs. It is seen as a trap because the bullish investor purchases the stock, thinking it will increase in value, but is trapped with a poor performing stock whose value is still falling.

• Experienced traders can make use of the RSI indicator and Fibonacci retracements in order to check whether the price drop is questionable and is likely to continue or not.
• As mentioned earlier, watch the video below find out how to use this leading indicator in the bear market as early warning before the sharp move happened last week in S&P 500.
• Optimus Futures, LLC is not affiliated with nor does it endorse any trading system, methodologies, newsletter or other similar service.
• When a trader enters a position as the price is already close to the top of a bull trap, they may see it go a bit higher and become convinced that they’ve made the right choice.
• This breakout did not last long as the stock reversed with a decline back into the congestion zone .

Mass selling or buying a particular symbol affects the price, temporarily causing it to move in the opposite direction. During this short movement, some investors who believe that the market is already changing direction will be forced to respond to the movement of the market and thus fall into a trap. Traders can lower their chances of being caught by bull traps through seeking validation following a breakout through various technical indicators. The shift traps investors that bought stock when there was a strong buy signal and can be the leading cause of losses from long positions. If you suspect one is on the way, here are some tips to identify it. Therefore, it can be expected that there are some indicators that signal that a price surge is not the start of a bullish trend but a bull trap. When deciding whether to buy a token when its price starts growing or not, check the following details.