Resistance levels hold, the market is more likely to veer off course. Point & Figure («P&F») charts differ from traditional price charts in that they completely disregard the passage of time and only display changes in prices. Rather than having price on the y-axis and time on the x-axis, P&F charts display price changes on both axes. There are several chart patterns that regularly appear in P&F charts. These include Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms, etc. When you are trying to avoid a bull trap, a trailing stop might prove to be most helpful as it will trail behind the current market value by a predefined amount of points.
Here, it takes the typical break expected by all traders, and then, later on, it breaks past the resistance level. 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. In order to avoid bull traps and mitigate your risks whenever you’re trading breakouts, you should consider these bull trap trading tips. Therefore, price breaks the resistance and breakout traders jump in with their buy orders and push the price even higher. Furthermore, sellers or bears which have many sell orders cause the price to drop and trap traders who had long positions. This causes the traders who jumped in to incur losses as the stock or cryptocurrency’s price declines rapidly.
There are some steps that investors can take to avoid falling into a bull trap. If there is a sudden surge of buyers, that may be an indication that a bull trap is forming. If the market is in a downtrend, that may signal that a stock is more likely to reverse course. Finally, don’t get too caught up in the excitement of a rising stock. If it starts to look like a bull trap is forming, it may be best to take your profits and get out before the stock starts to fall. When thinking about fake buying signals that “trap” traders in losing positions, bull traps are usually the first thing that comes to a trader’s mind. Another great strategy for avoiding bull traps is to look at the trading volume following a breakout.
This order will close out the trade if a certain amount of money is lost or a certain price is reached. Larger position sizes carry greater risk and profit potential than smaller ones. Do note however that shorting comes with extremely high risk. In the event that your forecast is inaccurate and the market reverses into an uptrend again, you may face infinite losses depending on how much the price increases. This is a high-level trading move that only experienced traders should attempt to undertake. But remember that technical indicators are just that—indicators—not guarantees that a price will move a certain way. Typically, with technical analysis, you don’t know for sure whether it’s a true reversal or a bull trap until after the fact. That’s why many chart watchers suggest charting multiple time frames to add context to your views.
Finding Potential Bull
How can you tell a bullish trend?
The bullish trend is characterized by heavy buying pressure exerted by the bulls. When there is a rise in the prices of about 20% then it is identified as a bullish trend.
The thinkorswim platform has hundreds of technical indicators and studies to choose from, plus dozens of drawing tools so you can create your own patterns. TD Ameritrade clients have free access to articles, videos, webcasts, and a fully immersive curriculum covering all elements of technical analysis. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. To effectively avoid the negative impact that bear and bull traps can have on your trading balance, we recommend using a combination of the methods described above.
Identifying & Avoiding Bull Trap & Bear Trap
Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. So, the bull trap is the pattern that can cause significant losses. Another way to avoid a bull trap is to wait for the indicators to provide enough evidence that the pattern is unlikely to develop. Bitcoin isn’t the only cryptocurrency susceptible to a bull trap. The bull trap was present on a 4-hour price chart of Ethereum the same way, right before it collapsed on May 19, 2021. As the stop loss is triggered, more sellers are added to the market. This negative feedback loop generates strong downward momentum on prices, and the market moves very swiftly to the downside. As the market trends lower, it begins to trigger the stop losses placed by the long traders. A bull trap is when a steadily declining asset appears to reverse in a convincing rally but soon resumes its downward trend to even lower pricing.
Also, many of them open short positions to compensate for their losses and cause the price to go lower. The lesson of the bull trap is that buying at the very first sign of a possible new uptrend can be dangerous. Many of these attempted moves higher may fail because there is little overall buying pressure to begin with. An asset with an RSI of around 70 and above is considered to be overbought, which indicates a potential bearish reversal due to profit-taking. On the other hand, an RSI of 30 and below is considered to be oversold, which means it is likely to increase in price. Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.
The last case was a perfect example of why you should not open a long position right after a candle closing above a resistance line. Price got rejected by bears and it closed below the resistance line. Also, the next candle couldn’t close above the resistance line and caused the price to go lower. As you can infer, the price was rising but then experienced a sharp decline followed by a series of lower swing highs . Those who bought may wish to sell or they might face larger losses.
- These include Double Tops and Bottoms, Bullish and Bearish Signal formations, Bullish and Bearish Symmetrical Triangles, Triple Tops and Bottoms, etc.
- 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.
- There are two main types of resistance levels where bull traps have potential to form which I will show you here.
- On the other hand, many long investors add to their position over time.
The above is a real-life example of a bull trap in the Honeywell stock market. The stock price had seemed to break out of resistance levels and was on an uptrend. However, this was quickly followed by a reversal into a steep downtrend. A bull trap fools some traders into thinking a market or an individual stock price is done falling and that it’s a good time to buy. But then it turns out it’s not a good time, because the price soon resumes its descent, catching buyers https://www.beaxy.com/market/aion/ in a money-losing trap. In many ways, it’s the opposite of a “bear trap,” which can fool traders into selling out too soon in the midst of a bull market. Traders who have established sell restrictions or have risky assets will receive an alert. The bulls’ power will eventually diminish, and the market will revert to the degree of resistance from which it sprang. Breakout traders who went in intending to earn revenue but wound up losing are in a similar boat.
Double Top Pattern
This will auto close your position in case the market value falls by that set amount. Nonetheless, when the stocks are acquired, automatically they become selling pressure on that stock as the investors only receive profits when they sell. Thus, if too many people purchase the stock, it will reduce the purchase pressure and thereby increase the selling pressure. Wait for a break below an important support level or the formation of a fresh lower low before opening a sell order. Although this means leaving some of the profits on the table, there will be a higher probability that you’re on the right side of the market. – Sudden spikes and upside breakouts are usually accompanied by strong bearish divergences between the price and an oscillator, such as the RSI. Read more about litecoin to bitcoin calculator here. Bull traps can be very frustrating as they seemingly provide attractive buying signals, only for the price to immediately and abruptly reverse in the opposite direction.
However, if these symptoms are not present, the crypto market remains at risk of falling further — which means taking on losses in your trading account. 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. Crypto markets frequently trap most traders into buying too early. Let’s look at a couple of examples where the bull trap led to quick and large collapses in Bitcoin and Ethereum prices. Bull trap patterns are often referred to as a “dead cat bounce.” They are commonly seen in all markets, especially in crypto markets, due to frequent swift recoveries. Therefore, crypto traders may anticipate a bounce and buy tokens too early, leading to large losses and frustration.
One of the easiest patterns, a double top pattern, is formed before a bearish trend. The price touches the resistance twice, forming two tops, then declines. The bull trap on trading appears when bulls lose their force and can’t push the price further up. The most common ones are the lack of positive events and a continued uptrend.
— Maher Joudi (@joudi_maher) July 18, 2022
This is the most classic pattern where you have two swing points where the second swing penetrates the prior high and then immediately gets rejected. Big players are intentionally pushing the price higher to entice unsuspicious buyers. A decline in price is indicated by a sequence of lower lows and lower highs. Look at the following image and see how a range forms before the trap. Bull trap candlesticks to look for in this situation are shooting stars or pin bar candlesticks. The price then falls back below the prior high or resistance. A stop order will not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
Some experienced traders use the chart pattern and technical analysis to look for trapped traders and try to benefit from the scenario. A bull trap is a situation when the price breaks above the resistance, seeming to signal a strong uptrend but then reverses and declines. A mistake could either lead to you losing money or a missed opportunity to enter the market at a reasonable price. The H4 chart of EUR/USD shows that the price broke above the previous resistance within a strong bullish trend. We can see several retests of the previous resistance level that became a support for the price. After it fell below the support, a new downtrend started forming. In April 2021, Ethereum exhibited technical signals that suggested a low likelihood of a bear trap. As illustrated above, Ethereum avoided the bull trap and ended up with a breakout, rallying 83% in value.
The reason is most traders are either in concentrated positions or simply have not come to grips with the concept that they can lose the money. This leads to these bull traps, where the weak longs panic during climatic events and unload their shares to the smart money. There is always someone else on the other side of your trade and, thus, you should think twice who is buying from you and why do they want your trade. For instance, if the price of an altcoin has been rising steadily over the past few days, you may believe it will continue to rise. You buy some and wait for the price to go up so you can sell it at a profit. That said; a trader can avoid bull traps by steering clear of late entries. If a trend has been running for a period deemed as “too long”, then it is best not to trade it.