Capital markets like crypto, stocks and forex are full of traps designed to prey on unsuspecting and emotional retail traders. Two of the most common are bear traps and bull traps.
Traders have many challenges when trading, these include high volatility , unexpected events, incorrect signals, risks, among other challenges like Bull Trap or Bear Trap. Before we tell you about the Bear Trap and the Bull Trap, we will tell you what traps are like in Trading.
What is a trap?
Every day, the market presents numerous traps that reach a large number of people and absorb the volume necessary to survive. The market constantly develops pricing structures that confuse the vast majority of participants.
The trap occurs when the price appears to be about to break a key level , such as support/resistance lines, dynamic trend lines , or major moving averages, and then is pulled in the opposite direction. For example, it passes the support level in a downward movement and then goes back up.
” as I mentioned the Traps can be bullish or bearish . In a market structure the ascendants are called Bulls, that is, Bulls Traps and the descenders are called Bears , Bears Traps.”
This type of trap can be caused by the behavior of the main market players(whales , exchanges, institutional investors, hedge funds ) in order to liquid retail traders by hitting their stop-lose or liquidation price to put them out of the game!
Bull Trap :
A bull trap is a situation where the price breaks through resistance, indicating a strong upward trend, but turns and falls.
To identify this type of bull trap, it is necessary to identify the following:
-The general trend is still bearish in the long-term and price suddenly goes up .
-There is a rally that looks like a trend reversal.
-The price goes back up, creating higher high of previous leg , which puts everyone out of the game as stop-loss was usually just above the recent movement .
-The price drop below the previous high again .
Likewise, to avoid get in a bull trap , you must also:
-Watch for resistance tests: in this case, if the price tests resistance several times in the strong uptrend, it could be an indication that a price reversal is coming.
Define the sideways movement: If the price has started to move horizontally within the uptrend, the uptrend is likely to end soon. So, if the price crosses an upper line of the horizontal channel, you should stay away from the market to avoid a possible bull trap.
Check candle size: the price forms a larger candle than the previous one in the last step of the trap. There is no 100% guarantee that it is a trap, but it is better to be careful and confirm with models or indicators.
Bear Trap :
You should be especially careful not to fall into a bear trap when you want to open a trading position when the price is breaking the support line. This is because when the price breaks the support line, some traders go short and then the price reverses and goes up.
Now traders are left with open short positions, so they can exit trades or wait for the price to reach the stop loss level they previously set.
To identify this type of bear trap , it is necessary to identify the following:
The general trend is still bulish and price initially goes up.
There is an upward to downward reversal that forms a top. People go short and place their stop loss just above this high.
The price goes back up, above the previous high, triggering many stop losses.
How can you avoid these pitfalls?
Traders and investors can avoid traps by looking for confirmations following a breakout. For example, a trader may look for higher than average volume and bullish candlesticks following a breakout to confirm that price is likely to move higher. A breakout that generates low volume and indecisive candlesticks—such as a doji star—could be a sign of a Possible traps.
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 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.
1-Check the volume as first confirmation:
Real price reversals require a significant amount of volume . If you see a sudden reversal without a large amount of volume behind it, it’s most likely a trap.
2-Look for different divergences confirmations:
for example false breakouts preceded by significant negative RSI divergence. RSI or “relative strength indicator”, is a popular momentum indicator that charts the strength and weakness of an asset’s price.
3-Check the News:
News, whether it’s good or bad, can have a significant emotional effect on inexperienced traders and lead to poor irrational trading decisions.
Market makers know this and often use news to initiate bull or bear traps. If you see a sudden price movement with average volume , be sure to check the news before making any trading decisions.
More often than not, movements like these are simply designed to catch emotional traders off guard,
And more importantly, ask this question in which market is a news broadcast? For example, in the recent down market, Dogecoin was supported several times by Elon Musk , which continued its downward trend as a bull trap after the temporary price pump.
4-Risk Management rules:
(proper position size and stop-loss )
Using stop-loss orders is a crucial part of any successful trading strategy. Even if you feel completely confident about a trade, the market can still completely go against you.
It’s important to set a strict loss allowance by closing a position if a trade goes the wrong way. it dosent matter where you place your stop lose by set aside maximum 1-2% loss of your starting capital can be a good starting point.
5-Choosing the right market and instrument
Also, as a last point, it is very important in which market we trade and which pair we choose
For example, if you trade in the cryptocurrency market, you should know that this market is much more subject to manipulation by whales and big players due to the inherent risk such as the low market cap and the very low trading volume compared to other markets. They can manipulate the market price and the price of a crypto token, so if we trade in these market, it is important to pay attention to choose a the appropriate pair by good trading volume and marketcap .
It can be wise to always use risk management rules and stop loss order to build potential losses into your trading strategy and minimize emotional turmoil. Don’t expect the market to recover in your favor because many times, it simply won’t. Bear and bull traps are one of the most common trading pitfalls when trading in any market especially cryptocurrency market . Thankfully, it’s easy to minimize losses by identifying these traps or if you have the right cryptocurrency trading strategy and mindset.
This article is for informational purposes only!
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