The price is constantly moving in different directions. Sometimes you may notice, that it slightly passes a key level and go back immediately afterwards. This could be a bull or bear trap.
Have you ever heard about the bull and bear traps? This article will describe them to you. Moreover, you will get the knowledge necessary to avoid them as well as to use them to your advantage. Let’s get started.
Key Takeaways🔑
| →Bear traps and bull traps are deceptive price movements that can occur around important support and resistance levels. |
| →Bear traps occur when the price breaks below a support level, trapping bears who have opened short positions. |
| →Bull traps happen when the price breaks above a resistance level, trapping bulls who have opened long positions. |
Contents
Bear and bull traps on the price chart
The trap is when the price looks like it is going to break through an important key level such as support/resistance lines, trendlines or important moving averages, and then it goes backwards. For example, when it passes the support level on a way down and right after it snaps back upwards.
Such traps can be caused by major market players’ behaviour in the market. We distinguish the bear and bull traps.
Identifying the bear traps
You should be careful not to be caught into the bear trap when you want to open a trading position at the moment the price is breaking through the support line. When the price is breaking through it, the bears enter short trades. However, the price reverses and moves upwards. The bears are left with the short positions opened, so they can either exit the trades or wait for the price to reach the stop loss level they have previously set. When the sop loss orders are executed, the market momentum will accumulate and the price will move higher.
When the major support level is being regularly held, the confidence of the bulls and bears is growing. Those who wish to trade the support breakout prepare themselves for going short.
At last, the price moves below the support. The bears open their short positions. And then, the price suddenly reverses and the bears are trapped. To illustrate the bear trap, consider the example below.
Recognising the bull traps
You can encounter the bull trap around the important resistance levels. The price is breaking through such a level and the bulls open long trades expecting the price will continue upwards. Instead, the price quickly snaps back and move downwards. The bulls are trapped in their long positions. They can either close the trades or wait until the price hit the stop losses they have set beforehand. The stop loss orders are being executed and at the same time, the market momentum picks up, and the price moves lower. The trap is completed.
The bull trap is often created around the resistance level which was tested regularly in the past. The traders’ confidence increases and the breakout traders open long positions when the price passes through the key level. They expect the price to continue upwards.
But the move upwards is only temporary. The price quickly changes the direction and falls. The bulls are trapped in the long trades.
Using the bear and bull traps in trading on the Olymp Trade platform
Knowledge is power. And you have now learned how to identify the bull and bear traps. You can use this information to avoid being trapped in the FX. You can also use the traps to your advantage and open trading positions in the right direction.
Primary, recognise the support and resistance levels on the price chart. Then observe the movement of the price to catch the fake breakout from the important levels. Trade in the opposite direction. If you notice the price seems to break out from the support, go long. If it happens on the resistance level, go short. If you are trading with fixed time trades your position should have a duration at least 3 times higher than your chart time frame. So for example, if you recognised a bull trap on the 15-minute chart you should open Down trade for the next 45 minutes.
Pros and Cons of Bear and Bull Traps 🐻🐂
Consider the advantages and disadvantages of bear and bull traps:
👍 Pros:
- Provide opportunities to identify and avoid potential false breakouts
- Can be used to open trading positions in the opposite direction for profitable trades
- Helps traders understand the psychology of market participants
👎 Cons:
- May lead to losses if misinterpreted or not properly managed
- Can be challenging to accurately identify and differentiate from genuine breakouts
- Requires knowledge and experience to effectively trade bear and bull traps
Comparison of Bear Traps and Bull Traps 🐻🐂
| Aspect | Bear Traps | Bull Traps |
|---|---|---|
| Definition | Price breaks below support level, trapping bears who opened short positions | Price breaks above resistance level, trapping bulls who opened long positions |
| Market Phase | Occurs during a downtrend | Occurs during an uptrend |
| Psychology | Bears enter short trades anticipating further downside, but price reverses | Bulls enter long trades expecting upward continuation, but price reverses |
| Impact | Accumulation of market momentum, leading to potential price increase | Execution of stop loss orders, resulting in potential price decrease |
Summary
It is crucial that you know the bear and bull traps can occur. You should recognise them on time and act accordingly.
Remember the traps appear on the important market areas such as support/resistance, trendlines or major moving averages.
There is a free demo account available at Olymp Trade. Use it to practice recognising the bear and bull traps. Trade them in a way which will bring you money.
Share your thoughts on the bear and bull traps in the comments section below. Have you ever traded the traps?
Avoid being trapped!
Q&A on Bear and Bull Traps 🙋♂️
Here are some frequently asked questions about bear and bull traps:
- Q: What are bear and bull traps?
- A: Bear traps and bull traps are deceptive price movements that occur around important support and resistance levels, leading to potential reversals.
- Q: How can I identify a bear trap?
- A: Look for a break below a support level followed by a quick reversal, trapping bears who have opened short positions.
- Q: What is a bull trap?
- A: A bull trap occurs when the price breaks above a resistance level and swiftly reverses, trapping bulls who have opened long positions.
- Q: How can I trade bear and bull traps?
- A: Traders can use bear and bull traps to avoid false breakouts or open positions in the opposite direction for profitable trades.
- Q: Are bear and bull traps reliable trading signals?
- A: Bear and bull traps require careful analysis and confirmation from other indicators or price patterns to increase the reliability of trading decisions.