Greetings traders and welcome back to another In Depth with Chris episode.
In today's discussion,
we will be talking about the notorious Bull Trap.
That's when your friendly neighborhood bulls come along and
they get stuck in a trap that is just not good for them.
We're going to cover all of the details of how the Bull Trap works,
and how you can avoid falling into it, and to potentially
consider if you're interested in trading it.
We'll talk about the ways that that can be done as well.
But without further ado, let's do me a great favor and click
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Now, let's get on into that material.
With the election looming just around the corner
and all of this COVID-style marketplace action occurring on a daily
basis with the volatility that's out there,
there's really no better time than now to be aware of the
traps that exist in the market and how we can steer clear
of them, and that's exactly what we're going to talk about;
How we can avoid catching a falling knife.
So what is a Bull Trap?
Well, a Bull Trap is a false signal that typically occurs
in a bear market.
Naturally, you might be inclined to believe that there is
such a thing as a bear trap as well, and you would be correct.
It's just the exact opposite of this scenario.
It tricks traders into thinking that the price of a security,
the bull trap that is, is done declining.
They believe it is it a valuable point in time, causing them to jump in, buy
and unfortunately get run right over.
I'm sure all of us at some point or another have witnessed
or been in a Bull Trap without even realizing it.
Essentially, this type of trade
denotes a reversal against a short-lived bullish trend.
It forces buyers to quickly exit their position or to continue
suffering losses because they thought it was the right time to buy.
Let us consider this chart as a way to understand how a Bull Trap works.
Essentially, what we had in the market was sideways moving
action followed by a substantial downward swing. During
the downward swing, the market reached a point where it seemed
to have reached its end of falling and we actually have three
bullish candles here in a row, setting new highs in relation
to the candles before them for the most part, and then we actually work sideways,
another bullish candle over here. An inexperienced trader might
see this and say, well because we didn't drop below the low of this candle,
we are currently holding and
the reversal has come so it might be a great time to buy.
While in all actuality,
this was indeed a Bull Trap as the market currently dumped
or went ahead and dumped lower, not currently, but dumped lower
and pushed onward. This is the type of behavior that can
actually encourage more sellers to jump
in the market. When they witness a Bull Trap in progress after the bottom breaks
out of the sideways moving period, a lot of sellers will jump
in trying to take advantage of that Bull Trap momentum and
ride lower. The buyers that were jumping in at this point
have two choices;
They can hold for an extremely painful ride, or they can
be prepared and cut their losses with a predetermined stop loss
or just simply jump out with a predetermined mental
stop loss, if they decide. This is just a general overview
of how the Bull Trap works.
In many cases, the signs are more subtle and
it takes a trained eye to be able to spot them.
Throughout your trading career, as you understand what
the market is doing, you'll find that there are scenarios
that present themselves more apparently over the practice
of identifying these Bull Traps.
Let's talk about exactly how to identify a bull trap.
This is not something that's ever going to be a one-size-fits-all
easy process, but it can be simple if we know what to look
out for as a general idea.
It's all about learning to recognize a failed breakout and
a looming reversal back down.
Here are some of the most common signs listed
why a Bull Trap pattern might be developing.
The first one is that the market is testing the resistance level multiple times.
That's when the markets coming up to this area, trying
to get through and it's not doing it.
It keeps getting stuck at this area and it's not able to
push beyond. This is an indication that price may be getting
ready to dump back down because it doesn't have the power
it needs to break through the resistance of this short-lived
potential reversal.
Number two is that we have a long green candle just before
the market turns the other way.
If we notice an unusually long green candle stick at the
end of a bull rally in a bear market, it could mean that
more buyers are joining the bandwagon.
They likely believe that the breakout has solidified and
it's safe to start buying again.
But then again, it could also mean that "whales", big market
players and institutional investors, are intentionally pumping
up the price to attract the unsuspecting buyers.
When enough buyers have entered the market
they suddenly start dumping, leaving the buyers to pick up
the resulting losses.
This is a common experience in many small markets such as
the crypto currency markets, and this is usually why we don't
recommend inexperienced traders get involved with such
volatile market places where this is more common.
Number three is going to be the chart forms a range. A range occurs when
the price is just moving up and down, up and down, between
a centralized area of support and a centralized area of resistance.
This usually means that buyers and sellers are both fighting for market dominance
but neither side seems to find enough momentum to come out
on top or break out the bottom.
Buyers are actively defending the support in order to try to push price higher.
Sellers on the other hand are actively defending the resistance and
they are trying to push price downward.
Eventually, one side will win for a period of time.
If we think about this, and we're currently in a bearish market causing this to be the
creation spot, or being the precedent before we walked into this,
that means that the overall market dynamic generally is
of bearish intent, which means it's more likely in this
scenario that we are going to break out and continue lower
with the overall momentum. Not always, but this is a common theme with the market.
Then number four is going to be, is the asset overbought or oversold?
If you don't know how to recognize a Bull Trap pattern, we can always take
a look at something like, say the RSI.
This is an RSI, meaning the Relative Strength Index indicator,
to get an idea if the security that we're looking at is relatively
overbought or oversold. This information in and of itself
can help us understand whether or not a Bull Trap is likely.
If the asset is considered overbought, it will likely perform
a bearish reversal shortly after the breakout occurs.
If it's deemed oversold by the RSI, the prevailing bullish trend following
the breakout may continue, though
it's usually best to wait for confirmation of the trend before
we just simply open a long position.
There are several ways in which a Bull Trap can occur,
like we said, and they all revolve around a false
breakout. If we've been trading for some time,
it's pretty common that we'll have encountered a Bull Trap
at least, you know, maybe a hundred times or so, across
the span of a few years.
This is something that is common to fall victim to and even to this day,
I still fall victim to a Bull Trap every once and again.
With this example here, we can notice that the price breaks upwards,
making some bullish progress, before encountering this heavy
resistance overhead with some sideways movement.
If we were to enter a long position during the sideways period because
we did see this little break upwards, we would be in for
a rude surprise because the market did in turn go heavily
downward, breaking the support of the range.
One of the worst things about a Bull Trap is that it's not immediately
recognizable at times.
It's one of those almost hindsight easier found
traps, which is dangerous to us as traders.
But the more we find that we've analyzed them after the fact,
the more likely we are to be aware of them during the fact
or beyond the consideration side of understanding whether
or not we should probably be entering or waiting for further confirmation.
Even though Bull Traps can happen for various reasons,
most commonly, they occur because investors believe
a market downturn has ended. The simple fact is, they believe
the downturn is ended and it's time to buy, causing that market
to temporarily bounce upwards, trapping others before dumping lower.
The investors are eager to load up on shares as
a bargain, or at least what they think is a bargain, as they
expect the price to begin going upwards.
This initial buying action can push the price further upwards
and above the resistance levels on the chart that are currently
being witnessed by the buyers justifying buying,
eventually attracting even more buyers like a snowballing fulfilling prophecy.
But then, it turns out that this breakout was a false signal.
It was a false deity.
There just wasn't enough buying pressure to sustain that
upward trend and everything just comes crashing back down.
It's also possible that when price crosses those resistance
levels, the investors who are already holding
long positions, might decide to cash out and close their positions.
That causes an impediment on that upward progress and
that's because they're already happy with the gains that
they made, which increases the supply of the asset which then
creates more selling pressure in the market.
As the selling pressure continues to mount, and the price then starts dropping lower,
stop loss orders can start to become triggered.
This only adds more fuel to the downtrend. As a result,
the market breaks below the support level,
and goes ahead to establish that new low.
This essentially forms a bearish trend, and this reversal has now been squashed.
Bull Traps can also happen when there is low liquidity in the market.
If we're paying attention to the liquidity, that's another
way to spot a potential Bull Trap. If the liquidity is low,
then hey, there might be a bull trap on the horizon if it
starts to line up with the price action. Inexperienced traders
can calmly take this as a bullish reversal during these low
liquidity moments when they see these couple green candles
here and there, working their way upwards, but in reality
if you're not aware of the amount of volume in the market,
or the overall trend before the Bull Trap began, it can be
a very dangerous road if you get caught.
You might be wondering if it's even worth trading if you
have already spotted a Bull Trap. Most traders and investors
are more concerned with getting out of a Bull Trap rather
than trading and executing through them, but it is absolutely
possible, of course, to trade during a Bull Trap,
but that is assuming that you know how to escape it
if you're going against the trap.
One of the best ways to escape the Bull Trap is to set yourself a trailing
stop loss order as we open our position. This helps us protect ourselves
against those further incurring losses
if the trap does snap shut and it starts falling lower.
More importantly, a trailing stop order can help us lock in
as much profit as possible before the losses do start coming in.
Trailing stop orders are a very valuable tool,
if we're trying to trade during a bull trap,
just trying to see how much we can gain, because if the market
is going in our favor, we want to use that trailing benchmark
to make sure when the trap does finally snaps shut,
we lock in whatever profits that were saved by our
stop loss that continue to trail behind our wins.
There are a few ways that we can increase our chances of
closing out with profit or surviving a Bull Trap with as
minimal amount of damage as possible.
The first and most important way, arguably, is to not panic. Just
don't panic. Panicking will only cloud your judgement and cause you to make a decision
based on emotional conviction instead of logical rational thought.
If we accept the losses as is and just move on, that'll
allow us to approach our next trade sooner and with a clear head.
The second thing that we can do is we can open a short position,
but only after we've confirmed that the current downtrend
is about to resume due to this Bull trap. If we had taken
the time to confirm the trend on the previous trade,
we probably wouldn't have fallen into the Bull Trap in the first place, but once we've
realized it, we can absolutely take advantage
of it, which means ride the wave, go with the momentum, and open that short.
Our third and final way to deal
with a Bull Trap when we are inside one, is definitely
more experience, and that's to go long on the retests.
If we've been monitoring the chart up until the time that
the Bull Trap occurred, then we can simply wait until the
price retests the resistance level again. Wait for a few candles
to retest the resistance within the range, then we can place
a stop loss just below the support level before placing our
buy order. Now once again, this is tricky because we are going
against the grain of the trap, just looking to scalp some of the range
that's occurring inside the trap.
To sum it all up, a Bull Trap does not have to be a terrible scenario.
If it is a scenario where we unfortunately will
be closing out with a loss in that scenario,
remember, it is just an individual scenario.
That word has been used entirely too many times at this point, but that's
all it is. Don't get hung up on it. Don't let it snow ball into other things.
If you're not using it as a profitable opportunity, close
it out, clear your head, and move on to the next position.
Until next time folks, thank you for joining me, as always.
If you haven't clicked that like and subscribe button down below, I'm going
to keep asking you to do so because it helps me
out coming out with these videos for you guys.
I will see you all very soon. Happy trading. Happy hunting.
I'll see you soon.