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. ● Eventually, the market went down a little, then back up to the resistance zone. It successfully did retest which formed a bearish engulfing pattern. ● The trader had been watching the price as it approached the resistance zone from the left. However, on its second attempt, it successfully breached the zone and closed above it. From this image, the double-top pattern is clearly visible. In this case, it has been made even clearer and stronger by the presence of a huge wick on the candle that completes the pattern. This rejection shows that although the buyers tried to push the price higher, the sellers rushed in and overcame them, resulting in the long wick. The buyers who thought that the trend would continue rallying upwards have their stop losses activated.
Bear traders that took that one, are now trapped and getting losses. We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders. We’re also a community of traders that support each other on our daily trading journey. Once the bull trap is released, the price usually resumes its downtrend.
What is a Bear Market?
Thereafter, a strong bearish candle formed, meaning that the buyers had lost and the sellers were now fully in charge. There are multiple ways that a bull trap can manifest itself. However, all of them will follow the typical concept that a resistance level will be intercepted, the price will attempt to break past it, and then the market will come crashing. 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. However, since most buyers have exhausted their resources, the sellers start pumping in their orders since they dominate strong resistance zones. The keen buyers who know this phenomenon start closing their trades.
Bollinger bands can give us an idea of how extreme a move is. One way to avoid getting caught in a bull trap is to know your levels. For example, if you’ve recognized that the futures price has difficulty hurdling over a specific price level, we can assume that is resistance. This technique is mostly used by professional traders to prevent bull traps. Bull traps usually happen quickly, and they have low volumes, So the price goes up suddenly with relatively low volume then after a few minutes/seconds falls again sharply. One of the most important skills for a trader is understanding a market sentiment, and whether the overall trend is changing from bullish to bearish or not.
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. Instability in the market – in such a case, bulls and bears are fighting to either pull the price up or press it to drop lower. For a moment, bears may win, and the token price increases. But if the market is bearish, and there are no reasons for the trend to change, the price will drop again. Now when you learned how to find the bull traps, we would like to suggest you several trading strategies. Since this is a 4h swing trading chart, this support break can be interpreted as severe, causing bears to open short positions. C shows the rapid price increase, also called a short squeeze.
This is called a bull trap because wiser investors are led into believing that a declining asset is actually bullish. When a bull trap is suspected, investors should immediately exit the trade or go short. Pay attention the candles tails that appear near the support/resistance levels. And if the market fails beyond a key level, this could signify a false break. You need to keep your eagle eyes open for that possibility. Often times the price attempts to break out of a support or resistance level. By the close of day, the price rejects the lever, triggering a large retracement or change of trend.
How to Avoid a Bull Trap
Also, identify the old swing low on the chart, and place a sell stop order should a breakout occur. Use the cascading sell orders to your advantage and align your trades to the direction of the larger trend, which is lower. 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. In the Bitcoin example above, the bull trap pattern shows that prices collapsed 42% within five days. Additionally, the market will experience a lack of momentum evidenced by the Relative Strength Index indicator.
Therefore, it’s better to have a mental stop-loss and use it when you found out that the trend is not bullish anymore and the price is going to fall soon. Actually, this candle didn’t have a bull trap pattern and it couldn’t even reach to the resistance line. Also, many of them open short positions to compensate for their losses and cause the price to go lower. Further, some of the breakout traders panic and close their long positions. You can also look for candlestick volume higher than the average volume.
Prices end up reversing lower as sellers overtake buyers, pushing the market down. When the market falls below the old low, the pattern is completed as the trader either stop the trade or is very deep in a floating loss . Then, traders anticipate the end of the correction and buy with the hopes of catching a good entry in the cryptocurrency atpoint 2. Perhaps their trade starts with an unrealized profit, but the attempted rally loses momentum and cannot be sustained. However, there are numerous occasions when a bottom or rapid upside reversal in a falling price trend is merely a pause before a sustained rapid decline.
So watch out for the close as part of your trading strategy. Let’s take a close at false break on the EUR.NZD daily chart. The easiest way to trade bear and bull traps is to first identify the major market support and resistance levels. This causes traders to open short positions with expectations of profiting from the asset’s price decline.
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. I would be re-missed if I just left you with a depressing article of how panicking cost me money. https://www.beaxy.com/exchange/eth-usd/ So, let me show you how I have matured in a short period of time to learn when I am “jammed up” and how to manage the trade effectively. I had my eye on Zynga for quite a while and decided to go long.
Many breakouts above resistance are followed by increasingly higher highs, but a bull trap is characterised by a bearish reversal soon after the breakout. It means the buyers have been in control for a very long time and are most likely about to exhaust their resources. This assumption becomes valid when the price eventually enters a resistance zone. The price usually slows down as shorter candlesticks start forming. We can match this occurrence to a significant number of long traders taking their profits at the resistance level. A bull trap is an occurrence that happens during an uptrend. The price of an asset goes up until it reaches a resistance level.
— MooseMoneyMoves (@MovesMoose) July 22, 2022
Bear traps tend to create more violent reactions when they occur in heavily shorted assets. Have you ever bought a futures contract in hopes of a breakout that never materialized? And instead, prices soon start to drop right in front of your face. When big players want to fill their orders in important price levels, they usually push the price a little bit in the opposite direction to generate fake demand. Always use other indicators like volume indicators to confirm breakouts and wait for a while to make sure it’s not a fakeout.
A bull trap is short-term bullish but longer-term bearish. The bull trap lures in buyers, creating a short-term rise in price. This eventually gives way to selling pressure and a falling price. Bull traps can have serious consequences for buyers during a perceived momentum reversal. Let’s say you are looking at the chart of a bearish asset.
Similar structure to April bull trap going into May fed meeting dump? 🤔 pic.twitter.com/R85JHoSUyZ
— Joshua9513 (@Joshuam67641509) July 22, 2022
The candle is composed of a long lower shadow and an open, high, and close price that equal each other. Martin has been covering the latest developments on cyber security and infotech for two decades. He has previous trading experience and has been actively covering the blockchain and crypto industry since 2017. Ethereum has continued to build on weekend gains during the Monday morning Asian trading session. Read more about 10000 bits in dollars here. The asset climbed to $1,412 in a move that has added 20% to its price over the past seven days. Ethereum prices have revisited a key psychological level as they close in on the last market cycle peak. Stop-loss orders can come in handy in these scenarios, especially if the market is moving fast, to avoid being swept away by emotions. The advice is simple, don’t trade if it’s too good to be true – an uptrend cannot continue forever. Investors need to mitigate their risks and the longer an uptrend has travelled, the increased likelihood that a trap will form.
- One way to avoid getting caught in a bull trap is to know your levels.
- 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.
- The bull traps occur when prices start heading upwards, but then, out of nowhere, reverse and decline.
- False break of consolidation is probably the most common false break.
- So watch out for the close as part of your trading strategy.
A bull trap is a reversal against a bullish trend that forces long traders to abandon their positions in the face of rising losses. It is called a trap because it often catches traders off-guard, and comes on the back of a strong market rally that looked likely to continue. You may consider entering a short trade if the price falls back below the resistance level, as the move higher was a false signal. There are additional tools that can be used for confirmation, such as technical indicators or candlestick patterns. A bull trap chart is a bearish signal that forms in an uptrend. The most common place for bull trap to happen is in a major resistance level/zone. Breakout traders will be looking to enter their trades as price breaks lower and through key levels such as major support areas, trendlines, or important moving averages. A temporary rise in prices may also force some short sellers to buy back shares to protect their profits, leading to even more buying. Being able to spot the bottom of a falling price is a great opportunity for bullish traders, but it is very important to be aware of how common bull traps are in today’s markets. Bull traps are characterised by a trader or investor buying an asset as it breaks through a historically high level of resistance.