Stock Market Bottom Or Bull Trap? The Wyckoff Method Reveals Insights

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. If the price rises above the resistance and falls, it’s not a 100% signal of the bull trap. In this case, wait until the price breaks below the previous resistance . If a breakout occurs, the trend is expected to turn bearish. If the price just tests the support and keeps growing, it’s not a classic bull trap.

With dozens of products available, including the latest micro contracts, traders can access more opportunities and optimize their strategies and risk better. Emotions can run wild, and if you don’t have stops or profit targets ready, then you’re more likely to get caught up in the heat of the moment and make a mistake. In the earlier example, the ES never managed to get and stay above the highs around $4300. It likely would have signaled a short-term reversal in the ES if they had.
On the other hand, an RSI of 30 and below is considered to be oversold, which means it is likely to increase in price. I never read the news, but sometimes desperation will push a trader to his limits. The best locations to find them are at resistances, when the price is far away from moving averages, or after violent drops. Although it’s so simple to identify, traders keep falling there over and over.

Bull Traders and Bull Traps

Another way of identifying bull and bear traps is using volume. Fortunately, many online brokers provide tools to view the amount of volume in the market. The best way to avoid these traps is to wait for the technical indicators to signal a bull trend is underway, which means waiting patiently. Do not expect the market to react the way you anticipate without the confirmation of proper indicators. Always do your due diligence — and know that you trade at your own risk. All in all, the best way to trade a bull trap pattern is to follow the prevailing trend lower and look for short-selling opportunities, rather than buying opportunities. However, the technical indicators on the chart illustrate how this rebound is potentially a false recovery. Price is well below trend line resistance and struggles to break above a horizontal resistance level . In addition, the recovery is not experiencing a range expansion .
Last week S&P 500, Dow Jones, Nasdaq and Russell 2000 all broke below the major support and dropped sharply into an oversold condition. This sharp move was anticipated just right before it happened based on the bear market leading indicator as I discussed in the video at the bottom of the post. Sometimes traders will get “FOMO” and chase into a trade because they don’t want to miss out on a potential profit-grabbing opportunity. Irrational behavior can cause prices to overshoot in the futures market. Traders who typically try to play breakouts are often driven by greed. Simply put, they are short-lived rallies that get overwhelmed by the broader and stronger bearish sentime.

Always Check the Trading Volume

And if you’re caught in this trap, the consequences can be quite severe. Bull markets are rising markets while bear markets are falling markets. Bull traps affect people who are bullish—those who think a stock is about to gain value. The range of results in these three studies exemplify the challenge of determining a definitive success rate for day traders. At a minimum, these studies indicate at least 50% of aspiring day traders will not be profitable.

If a final capitulation triggered by further Fed rate hikes and recession news later this month sends Bitcoin back below $20,000 then Ethereum is likely to follow. The three-day pump could be a bull trap since the asset has been in a downtrend for the past eight months and bear markets usually last a bit longer. Breakouts coupled with low trading volume are often a sign of an upcoming bull trap. Traders can avoid bull traps by keeping their eyes out for confirmations following a breakout. Traders can lower their chances of being caught by bull traps through seeking validation following a breakout through various technical indicators.
As a general rule, it’s better not to risk over 2-5 % of your capital in one trade. E.g. in an ascending triangle chart pattern, there is a high probability that price would break the resistance line and go higher. Using a tight stop-loss helps you to prevent big capital loss in breakout trading. You should put a stop-loss after opening your long position or have a mental stop-loss to use when it’s needed. The bull trap is always created around an important market area or level. The bear who is looking to go short will enter their short trade as price begins breaking lower. Price is slightly in favor of ‘trapped’ traders, providing them confidence and security. A good stop location will be when high breaks out, which indicates the Failure of a bull trap. Because of this mass selling, that stock’s pool of sellers far exceeds its pool of buyers, and the price begins to rise. Are you witnessing range expansion in the average true range indicator?
This ‘traps’ bulls into long positions that lose money as the underlying drops further. 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 notable increase in volume because many traders and trade orders are usually involved in the process. However, if you notice a reversal without a noticeable increase in volume, it could be that the price change would not last, and it is only a trap. A bear trap is a technical pattern that occurs when the performance of a stock, index, or other financial instrument incorrectly signals a reversal of a rising price trend. Bear traps can tempt investors to take long positions based on the anticipation of price movements that do not occur. A bull trap pattern frequently occurs in crypto markets, as it is a false breakout signal to bulls that a rally is underway. In reality, the trend is expected to go lower, and the market continues to seek out cheaper pricing.

That said, if after breaking past the resistance level, the price tests it again but fails to gain upper momentum, then another classic bull trap pattern is created. As such, one way to identify a potential bull trap is when the price makes significant stops on a resistance level after a long sustained uptrend. Lack of confirmation is one of the most frequent mistakes made by those caught in bull traps. They should already suspect that if the present high does not surpass the previous high, then it is in a downtrend or a range. In the instance of a probable bull trap, a high RSI and overbought circumstances suggest that selling pressure is increasing. Traders are eager to pocket their gains and will most probably close out the trade at any moment.

  • However, by conducting careful technical analysis and fundamental analysis on the asset, traders can identify and avoid potential bull or bear traps.
  • 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.
  • As a result, we have no reason to believe our customers perform better or worse than traders as a whole.
  • It also reflects bears and bulls unwavering in their positions on the market, which causes the price to move horizontally in a narrow range.
  • It can be very hard to identify bull traps compared to an actual reversal in a security’s price trend.
  • A trade’s position size depends on your risk tolerance and market you’re trading on.

This is possible via spread betting and contracts for difference . First, there is often a desire on the part of buyers to enter a trade at the first sign of a price rise. This may make these traders more susceptible to getting ‘trapped’ because there is little evidence of an actual sustainable move to the upside. They are buying with a bit of evidence – the price moving above resistance – but they are mostly buying based on hope as the breakout turns out to be fake. Candlestick charts are another handy technical toolto help identify price patterns. Some candlestick chart types are specifically designed to help spot bullish or bearish movement and whether a trend looks to be continuing or reversing . Hi Rainer, I read Price action trading secrets, your book. Your teachings are very easy to understand, your methodology is fantastic and is, all, practical stuff not pure theory. Today’s bull and bear traps excellent and is like a contrarian way of trading.

How to escape a bull trap

Even though I just committed myself to the possibility of a loss down to $1.68, I couldn’t stop myself from thinking, well what if the stock goes to 90 cents or zero! I mean we are talking about a biotech stock and we know how these have made and lost millions for a lot of people. At the end of it all, I accepted the fact that the “market happened” and there is nothing I can do about it. So, with that in mind, I placed a mental stop loss at $1.68 and I was going to let the market move in its desired direction. As I scanned back through the chart I noticed a swing low at $2.02 and another one at a $1.68. For me, this would have represented a potential loss of ~37% and 48% respectively.

Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock – BKI – a Listed Investment Company , and since then hasn’t stopped. He hopes that Equity Mates can help make investing understandable and accessible. Alec developed an interest in investing after realising he was spending all that he was earning. While his first investment, Slater and Gordon , was a resounding failure, he learnt a lot from that experience.

Bull Trap Chart Pattern #2:

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.” If you’ve never heard about the Volumes indicator, it’s high time to learn about it. It may rarely provide trading signals, but this instrument is widely used by traders. So, the bull trap is the pattern that can cause significant losses. There’s an opposite situation when the price rises after breaking past the support line. Traders face various challenges, including high volatility, unexpected events, wrong signals, risky assets and more. Those who shorted can become trapped in a losing trade and must buy to exit, and those who sold may experience regret for selling and wish to buy again, driving the price higher. The lesson of the bull trap is that buying at the very first sign of a possible new uptrend can be dangerous.

SPY: Is This a Bull Trap? –

SPY: Is This a Bull Trap?.

Posted: Mon, 02 May 2022 07:00:00 GMT [source]

Read more about bitcoin conv here. Still waiting for capitulation and real panic, dip buyers not… Bullish traders look for hidden value in a security, while bearish traders try to discover negative features of a security that the market has overlooked. These different trading approaches tend to favor certain personality types. At the end of the day, it may be wise to avoid trying to time the market and instead buy into long-term investments or invest in more diversified securities, like mutual funds.
bull trap trading
Update it to the latest version or try another one for a safer, more comfortable and productive trading experience. Open Level Up Bonus account in web or mobile version of FBS Personal Area and get up to $140 free to your account. However, the RSI chart tells a completely different story. By the third test of USD413.50, RSI has dropped to 50, which suggests there is little momentum behind the move. Following a correction from USD0.92, B shows a break in the support line. By creating a free account, you agree to our terms of service. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply. Real-time analyst ratings, insider transactions, earnings data, and more. If you find that a strategy to be a total loser, consider creating a strategy that takes the exact opposite side of the trade.

There is an opposite to a bull trap, and it is called a bear trap – it occurs when traders fail to press a decline below a breakdown level. In most cases, low trading volume during the token price increase is an indicator of a bull trap. If you can learn to identify bull traps, they can actually be a great opportunity to trade in the opposite direction. Another thing to keep in mind is that bull traps often occur at key levels of resistance. So, if prices are approaching a level where they have struggled to move higher in the past, be cautious of taking a long position. A bull trap is a type of false signal that occurs in a market where prices are rising.
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 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. A bear trap pattern is exactly the opposite of a bull trap pattern wherein price movement encourages traders to place short positions after a small consolidation period. Following this, price breaks out to the downside, and it often signifies a correction or reversal of a trend. Finding bull trap chart patterns as well as key resistance zones can be really difficult, especially for novice traders.

It will help to avoid significant losses and even benefit from short-time price surges. Sometimes, traders are tricked into thinking a trading range is going to breakout of the support level, only for it to do a reverse back into the body. Just wait until there is an absolute close outside of the trading range,then you can starting hunting for price trading signals along the breakout. If you want to get to really know the bear trap, read up onLet’s Trade The Bear Trap.
Many traders or investorsuse the RSI indicatorfor overbought, oversold readings and to confirm a reversal breakout. A bull trap occurs when a security falls in price and then experiences a brief spike in value. An example of a market-wide bull trap would be what investors saw in the S&P 500 from 2007 to 2009. Over the next two months, the S&P recovered around half its losses. This was a bull trap, however, because the gains were short-lived. The S&P dropped to 683 by March 2009, the lowest point since 1996. A bull trap is when a security falling in price suddenly reverses direction and sees a momentary price increase. Shortly after this increase in value, the security loses value again, dropping even further than before the bump.