What is a Bull Trap A Comprehensive Guide for Traders and Investors
Various indicators can help you spot one, such as RSI divergence, lack of increase in volume, and absence of momentum. In my trading courses, I emphasize the importance of emotional discipline. Understanding the psychological aspects of trading can help you avoid the pitfalls of bull traps and other deceptive market moves. I’ve taught countless traders how to navigate the complexities of market psychology. It’s about being aware of the emotional triggers that can lead you to make impulsive trades. Traders see the price rise and jump in, fearing they’ll miss out on a profitable move.
Bull Traps FAQs
Bulls are getting nervous as latecomers have losses, and the MSL buyers give back all profits. Step 6 is the bull trap formation as NKE falls below the MSL trigger price at $98.86, putting all buyers above in the red. The bull trap continues on a downtrend as NKE again falls under the 5-period moving average and stays below it as prices plunge to $89.42.
A Huge Bullish Candlestick
One bullish candlestick isn’t enough to confirm a genuine breakout. Understanding a bull trap involves recognizing the psychological factors that lead traders to fall for it. Fear of missing out (FOMO) often plays a significant role, as does herd mentality. AMC Entertainment’s stock price journey from 2021 to present day, highlighting its volatility and significant price movements. We’ll cover what causes them, how to spot one and the methods for avoiding them. We also talk about turning these challenging situations into your favor in some cases.
Bull Trap Trading Guide: How to Identify And Escape
A single, large bullish candlestick during a supposed breakout can be misleading. It might seem like a strong buy signal, but it could also be a setup for a bull trap. In my trading career, I’ve found that volume is often the fuel that drives price movements. A lack of volume during a price rise is often a sign that the move lacks genuine buying interest. A lack of increase in trading volume during a supposed breakout is a red flag.
Lack of volume around buy signals means nobody else is interested. The move will likely fail, and you’ll be caught in a bull trap. You might think you have a natural gift for making stocks go down after you buy. All forms of investments carry risks and trading CFDs may not be suitable for everyone.
Maybe, but they had to endure massive losses of well over 60 percent along the way. I want dedicated students ready to learn the right process, mindset, and rules to grow their accounts over time. A lot of the time, I don’t even wait for a loss to get out of a trade. It means bulls are trapped on the wrong side of the trade and will have to take a loss to get out. Discover the range of markets you can trade on – and learn how they work – with IG Academy’s online course.
And it’s the best way to protect your account if you get caught in a bull trap. If you look at the intraday chart, you can see the stock was already overextended when it reached the multi-month breakout level. The circle https://cryptolisting.org/ shows the multi-month breakout level from the daily chart. You can see on the chart that the stock gapped up on the news. It went from around $2.80 to a high of $3.79 on roughly 255 million shares of volume.
In my years of trading and teaching, I’ve seen many traders get caught in bull traps, thinking they’ve found a golden opportunity for profits. Let’s dive into the nitty-gritty of bull traps, their dynamics, and how to trade wisely when you suspect one is forming. They can spot these setups by not only trusting their first look, but also waiting for confirmation from other indicators or a continuous movement in the price. This method assists in staying away from emotional purchases that bull traps want to stir up.
- Trades are influenced by the market context, whether a rising or falling market, bull or bear market.
- While bull traps are hindsight formations, there are strategies to help avoid them altogether.
- They can be challenging to spot, as they often involve a sudden and significant increase in the price of a security, making them appear legitimate to investors.
- On the other hand, bull traps can provide successful setups if you understand how they form and what they mean.
All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. There are only 112 trades since its inception in 1993, but the average gain per trade is a pretty solid 0.72% and the win rate is 66%. But as expected, the return is pretty erratic because short is very difficult to trade. It doesn’t matter which asset you are looking at, short is almost much worse to trade than long. Lastly, know that crypto trading is a risky activity, and proceeding with caution is advisable.
Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. One of them has sold 30,000 copies, a record for a financial book in Norway. Since its inception, there have been 188 trades, and the average was 1.25%. Stay on top of upcoming market-moving events with our customisable economic calendar.
We detailed the six stages of a bull trap to understand better why and how they occur. We also detailed the many indicator tools you can use to manage them and several examples of real-life bull traps. Administering discipline is easier said than done whether stopping out of bull traps vs bear traps. While bull traps are hindsight formations, there are strategies to help avoid them altogether. Having the discipline to maintain trailing stops is paramount.
It can be hard to accept that you were wrong about a stock so quickly, especially when you were seemingly right initially. It’s very tough to pivot quickly and accept the small loss and exit. This causes traders to stay committed to the initial pullback and panic when the pain is too great as the stock stumbles. Market psychology plays a significant role in the formation of bull traps. Traders often get caught up in the excitement, ignoring red flags that could indicate a trap. In my experience, it’s essential to look at candlestick patterns in the context of other indicators.
The markets are littered with the bodies of those who had short positions that they seemingly are “stuck in” as they wait, sometimes prey, for a reversal in trend again. To identify a bull trap, traders could watch for a bearish candlestick chart pattern just above the resistance area. A bearish is there any distinction between net current value and discounted money move candlestick pattern could indicate that buying momentum has slowed, and selling pressure is coming in. For example, the ‘shooting star’ candlestick pattern helped set the stage for the price decline on the EUR/USD chart. In this article, we covered how to spot bull trap stocks and avoid them.
Fast forward one day later and ZNGA hit an intraday high of $3.62 which was a gain of slightly over 10%. If you are not in control of your emotions, a quick 10% gain can cause a bit of an ego trip. After reaching a price of $30, XYZ again begins to gain value, rising to $35. During this time, investors begin purchasing shares, expecting XYZ to return to its previous highs. In a nutshell, that is how a bull trap is safely traded for easy profits. The safest way to trade a bull trap is to accept that the trend has changed and flow with it.
An example of a bull trap in the world of cryptocurrency can be seen in the case of Bitcoin’s price fluctuations in early 2021. After reaching an all-time high of nearly $65,000 in April 2021, Bitcoin experienced a significant price correction, dropping to around $30,000 by the end of May. Please refer to our Risk Disclosure Statement and Terms & Conditions so as to have a better understanding over the risks involved before you start trading. In the above image, we can see that the bulls were in control of the price movement for most of the time.
Many traders jumping on the perceived bullish trend lead to increased activity in the market, but this surge may not be sustainable. It comes down to sustainability, and whether the trend has truly set in. The price of the asset may experience a short-term decline, dropping below a support level, enticing people to sell existing long positions or take short positions.
If the asset’s price is rising but the volume isn’t, be cautious. I’ve always said, “You don’t have to mirror my techniques—develop your own.” The same goes for understanding bull traps. Know why they happen, and you’ll be better equipped to avoid them. Many traders who bought when it was near the top got caught in this sudden change. As a result of fleeing buyers and aggressive sellers, the momentum shifts in favour of the sellers.
That’s what I help my students do every day — scanning the market, outlining trading plans, and answering any questions that come up. There are a ton of ways to build day trading careers… But all of them start with the basics. Imagine a stock that has been in a downtrend suddenly spikes up. Traders jump in, thinking the bottom is in, only for the stock to plummet shortly after, trapping those who bought in. A ranging market can be a dangerous place, especially if you’re not sure which direction it will break.
The key takeaway is always to be cautious and do your due diligence before jumping into a trade. In the month of September 2020, when Tesla had an event named “Battery Day” that was talked about as possibly being a turning point, there was a big rise in its stock price. However, the news did not meet what people expected and this caused a quick drop in prices which trapped those who bought for speculation. Identifying a bull trap can be tricky, especially for novice investors. Several signals, though, can indicate the presence of a bull trap.