In this article, we are going to explain the most common traps in the markets, known as bull trap and bear trap, how we can avoid them and, above all, how we can take advantage of these market conditions. Pay attention, because this article is going to take you from the losers side and put you on the side of the smart traders.
The traps can be bullish or bearish. The traps for buyers are called bull traps and the traps for sellers are called bear traps. Generically, we sometimes refer to a trap as a swing trap.
First of all, we will look at how a market trap is formed. After all, it is simply a thing that is not what it seems to be. The price goes in one direction and we, as rebound hunters, wait for the right moment to open a new position in the opposite direction. However, it is a trap! Now that we are inside, the price continues with its previous movement, destroying our idea of making money.
We will recognize a bull trap or bullish trap when we see something similar to this:
- The price is falling.
- There is a bullish rebound that appears to be a trend change.
- The price falls again, creating a low below the previous bounce, which leaves every buyer out of the game, as their stop loss is usually just below the bounce low.
- Many buyers are trapped and suffering losses.
- Occasionally, the real bullish bounce happens later and the price rises now like foam.
We will recognize a bear trap or bearish trap when we see something similar to this:
- The price goes up initially.
- There is a change in the direction of the price from bullish to bearish where the market peaks. People open short positions and put their stop loss just above this maximum.
- The price rises again, above the previous maximum, causing a multitude of stop losses to jump.
- Many buyers are trapped and suffering losses.
- Now the price begins to drop sharply.
- Occasionally, the real bearish bounce happens later and the price begins to drop sharply.
How to avoid these market traps?
We can never be completely safe from the market traps, but we can follow a couple of simple rules to reduce the probability of being hunted.
The first and most important tip is that if we are to catch an upside bounce, it is best to ensure that this bounce occurs on a relevant support. In the case of a bearish bounce, this bounce is best against a significant resistance.
The second rule is this: You already know that the price spends its life moving away and approaching the average value. Make sure the bullish or bearish bounce doesn’t happen halfway. To better determine this, you have the enveloping channel and the value zone.
A third rule is not to place our stop loss where everyone else puts it. Place your stop loss further than the other traders (so as not to follow what the mass of traders do), but do not put your stop loss just below the last minimum (or just above the last maximum). If you do, you will be crying out for them to come and take the money out of your pocket.
And now comes the best. How to take advantage of the market traps?
How can we take advantage of a bull trap or bear trap?
Try to stay ahead of the market, as it is best not to fall into the traps. But regardless of whether we have fallen into a trap or not, the important thing is to recognize the trap and use it to our advantage.
We just have to do one very simple thing: Enter when the second (and authentic) bounce occurs. It’s that simple. That easy.
Once all the stop losses are executed and the professional traders make huge amounts of money by taking advantage of the traders who got caught, the price can only do one thing: Rise or fall sharply after the trap passes. If we already know it, why not take advantage of it?
Look for bull or bear traps on your charts and enter the market with confidence when you see a bounce in which the stop loss of most of those who tried to make money entering that bounce (and who have left with losses) has been executed.
In our trades, it is recommended to keep an eye on the traps in the market, since they can cause heavy losses if we are not careful. Review the main types of trades and be sure to correctly identify the relevant supports and resistances to get the most out of them.
I hope that after reading all this information you have a clear idea of what a bull trap and a bear trap are and what to do to earn money with these events. These traps are created by large market participants and therefore we cannot control them, but you can recognize and use them as if they were your own.
Does this mean that you will never be caught in a trap again? Not at all! If you usually trade in the markets, it is normal for sharks to bite you once in a while; However, the important thing is that these bites are few and, above all, that they do not leave you out of the game. Also, now you know how to turn a trap you have fallen into an excellent opportunity to make money.