The bull trap is a market condition that may cost you a fortune. This article contains a comprehensive explanation of what a bull trap in trading is, shown real examples, and shared hints to avoid bull traps. The reason bull traps are tough for new investors is the emotional aspect of the trade. For most new traders you will enter your position with some level of apprehension because you are unsure about taking the position in the first place. The stock you were just worried about begins to rally and not just rally but does so with price and volume. 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. In this example, the security sells off and hits a new 52-week low before rebounding sharply on high volume and lifting into trendline resistance. New bulls get trapped in long trades and incur rapid losses, unless aggressive risk management techniques are undertaken.
In short, the longer an uptrend has traveled, the more likely that it will form a trap. Based on the above sections, you’re probably already thinking that it’s best to simply not trade a bull trap at all. One of the worst things about a bull trap is that you won’t immediately recognize that you’re in it until the damage is done. In which case, the only thing you can do is offload your shares to avoid incurring further losses. But then again, it could also mean that whales are intentionally pumping up the price to attract unsuspecting buyers. When enough buyers have entered the market, they suddenly start dumping, leaving the buyers to pick up the resulting losses. Sellers can also become more aggressive with their selling, which further pushes the price down. Any buyers still left in the trap then bear the brunt of the negative market movement. Trading leveraged products such as CFDs involves substantial risk of loss and may not be suitable for all investors.
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A long sell-off where traders miss profit opportunities and become greedy in search of more profits. Traders reach a breakout, jump places, buy orders and price surge. Mitrade does not issue what is a bull trap advice, recommendations or opinion in relation to acquiring, holding or disposing of our products. All of our products are over-the-counter derivatives over global underlying assets.
- Bear traps form when the market breaks below an important support level, followed by an immediate and abrupt reversal.
- From the descriptions of a bull trap, a long sustained uptrend is usually a potential sign of this cunning pattern.
- I explain all trap and squeeze patterns in our strategy course.
- Lastly, make sure to incorporate sound risk management techniques, like implementing a stop-loss order.
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 range means that the price appears to bounce back and forth within a support and resistance level. This range might not be perfect, especially on the upper side, because the market might still be making smaller higher highs.
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An investor should search for a bull trap in a bullish market where the price is expected to move in an upward direction. An investor needs to monitor markets carefully to catch a turn in a trend. If the price rises above the resistance and falls, it’s not a 100% signal of the bull trap. In this case, you should wait until the price breaks below the previous resistance . If the breakout occurs, the trend is expected to turn bearish.
You should only trade with funds that you can afford to lose. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Bull traps are characterised by a trader or investor buying an asset as it breaks through a historically high level of resistance. Many breakouts above resistance are followed by increasingly higher highs, but a bull trap is characterised by a bearish reversal soon after the breakout. The best way to handle bull traps is to recognize warning signs ahead of time, such as low volume breakouts, and exit the trade as quickly as possible if a bull trap is suspected. Stop-loss orders can be helpful in these circumstances, especially if the market is moving quickly, to avoid letting emotion drive decision making. However, traders who also follow market fundamentals may know in advance that an upside rally in certain markets doesn’t make any sense. As selling pressure builds up and the market moves lower, stop-loss orders of traders who entered with long positions might get triggered, accelerating the down-move even further. As a result, the market could break below an important support level, form a fresh lower low, and form a bearish trend reversal signal.
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A Bear Trap occurs when there is a quick price decrease in an uptrend. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. what is a bull trap Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request. A stop order will not guarantee an execution at or near the activation price.
I want dedicated students ready to learn the right process, mindset, and rules to grow their accounts over time. The multiple big red candles following the failed breakout are a good example of why you should never hold and hope. That means that a lot of buyers are already in the stock, and they’ll probably be looking for any opportunity to take profits. So when I look for a buy signal, I want to see high relative volume to confirm the move. Sentiment on EUR/JPY has shifted towards negative over the last couple of weeks, so this latest bounce could be another opportunity to play the downside momentum. The breakouts are actually fakeouts, the price soon resumes a downward path. It is one of the least well-known strategies amongst traders.
Then, a few candlesticks later, the rally phases out, and prices start falling. Those market participants who had open long positions as they notice a breakout of the resistance now feeling nervous as their stop losses are getting hit. Common bull trap chart pattern A bull candlestick breaks and closes above the resistance level, but the next 2 bars are bearish. The second candlestick in the pattern resembles a bearish pin bar type of candlestick. A bull trap occurs when a trader or investor buys a security that breaks out above a resistance level—a common technical analysis-based strategy. While many breakouts are followed by strong moves higher, the security may quickly reverse direction.
A close above $376 (Tuesday’s high) would indicate a continuation of the recovery rally and shift the focus to resistance at $427 . The broader bias would remain negative as long as the RSI holds below 60 and the previous week’s high of $564 remains intact as resistance. Traders, therefore, may be inclined to sell the cryptocurrency on the bounce. Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
But such breakouts may actually be false signals, and the price soon resumes a downward path. The bullish abandoned baby is a type of candlestick pattern used by traders to signal a reversal of a downtrend. Using technical analysis of the charts of those stocks, and, when appropriate, recent actions and grades from TheStreet’s Quant Ratings, we zero in on five names. Cohu Inc. recently was downgraded to Hold with a C+ rating by TheStreet’s Quant Ratings. “From a technical standpoint, you want to beware of a bull trap. We have seen this huge increase in the markets the past couple of days. From a technical standpoint, we are just making sure the S&P 500 stays above the 2,750 level,” said David Nicholas of Nicholas Wealth Management on Yahoo Finance’s The First Trade. Amazon is trading over the 200-day simple moving average, which indicates overall sentiment in the stock remains bullish. Wait for a break below an important support level or the formation of a fresh lower low before opening a sell order.