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Trading The Bull Trap – Eliminating Losing Traders

A bull trap occurs when traders take a long position on a promising setup and then have price reverse and move lower very sharply. This pattern is called a ‘trap’ because the traders were tricked into a long position with usually very obvious bullish signals as we will see later.

Bull traps often happen around previous highs where it looks as if price is continuing the rally. Especially amateur traders often tend to enter too early around such key levels (read about FOMO here). It’s especially dangerous if price rallies for a bit and trapped traders see some profits because they feel too secure. When price then reverses, they hold on to their loss too long and/or add to their existing position. As price keeps moving against them, the loss becomes larger and larger until it hurts so much that trapped traders are forced out of their trades – this accelerates the reversal even further.



Bull trap orderflow – What really happens

To fully understand the dynamics of the bull trap and then to use this information to our advantage, we have to look at the orderflow and the thought process behind a bull trap. Here are the individual phases:

1) Prelude: a long rally where people missed profit opportunities and/or are becoming too greedy and want more.

2) Price then sets up a new trend wave that tempts people to enter new positions.

3) Price goes a little in the favor of the ‘trapped’ traders, creating a feeling of confidence and security.

4) Price reverses to the downside. People in disbelieve hold on to their trades that are turning into a loss. Others add to their loss, hoping to average down.

4.1) The professionals are the ones who are aggressively selling and the amateurs are still happily buying.

5) Price drops further and the trapped long position traders are now facing huge losses. Most are forced out of their long trades which means that they have to sell which accelerates the sell-off.


Bull and bear traps work exactly the same way – here it is from a bear trap perspective



Trading with insurance – 2 great tips

As reversal traders, it is essential to understand the dynamics of bull and bear traps because it is one of the most reliable and profitable types of reversal signals. Once you can see where traders are trapped and how the stops that get triggered on the way down accelerate a sell-off, you can make much better trading decisions and start trading against all the losing traders.

However, before we get into the types of bull traps, here are our two insurance concepts as reversal traders:


1) The late entry

For new and inexperienced traders, this is the hardest concept to follow and principle to internalize but it will make a huge difference in your trading. Never sell while price is going up and don’t buy when price is doing down. Only sell when price is already going down and only buy when price is going up.

Ever trade has 3 entries and whereas amateurs are either too early (entry 1 – predicting) or too late (entry 3 – chasing), professionals enter with confirmation.

3 entries



2) The tiebreaker – 20 SMA

The easiest way to make the concept of ‘insurance’ work is by applying the 20 period SMA to your charts and only trading in the direction of it. This means that you only trade short after a bull trap once price has broken the 20 SMA to the downside and you only enter a long trade after a bear trap after price has broken the 20 SMA to the upside.

Of course, there is a little more to reversal trading than just trading a break of the moving average (watch video here), but using the 20 SMA as your filter will automatically keep you from making the most common mistakes.



Types of bull and bear traps

Now that you understand the dynamics of how traps and squeezes work, we can take a look at a few different examples because, after all, trading is a game of pattern recognition and one type of setup rarely only has one way of presenting itself. As you will see, the bull trap and the squeeze patterns come in different forms and it pays off to understand the little nuances and dynamics that drive price.


Double top squeeze

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.



Gap squeeze

During a gap-squeeze it looks like price is gaining momentum on the gap and traders see themselves in profits longer. However, price just as fast gaps into the opposite direction and squeezes the trapped traders. The reversal on a gap trade is usually much faster since the squeeze happens suddenly and much stronger.



Engulfing bar squeeze – Range squeeze

The engulfing bar and range squeezes are not commonly discussed but they happen frequently. After a tight range or a slow trend, price suddenly makes a violent move and many orders will get triggered around the spike.

This type of squeeze works so well because it works in the complete opposite way how most losing trades think and you can exploit their weaknesses.



Pinbar squeeze

The pinbar squeeze usually happens at the end of an ongoing trend and it’s similar to the gap squeeze. Whereas it looks like price will continue the trend, the only purpose of this squeeze is it to allow the professionals to enter the new trend into the opposite direction for the best possible price.

Whereas the amateurs sold in the screenshot below, the professionals happily bought from them for a large discount.


You can see, the bull trap is not a standalone trading system but it’s a MUST KNOW price and market dynamic because it is the type of market behavior that exploits the weakness of the consistently losing traders. 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.

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  1. P e r f e c t .

  2. Very nice article! I have never seen this explained so well! Excellent!

  3. Thanks. This is OVER THE TOP! Alot of people need to see this. My eyes are opened.

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