Have you ever felt fooled by price movements? The pattern signal really supports bullish continuation, but the price actually moves down after breaking resistance. This is the Bull Trap phenomenon which is also known as one of the conditions of Fake Breakout. If you don't want to be fooled by the Bull Trap signal, you can learn to avoid the market trap like a pro trader. the first step in becoming a successful trader is out of amateur mistakes
To be able to deal with the market trap in a clever way, there are 3 stages that you need to apply, namely:
1. Understand the Bull Trap Basics
Bull Trap is basically a Price Action pattern that reflects market behavior. Therefore, the formation of the Bull Trap can be identified from the traders' psychological tendencies. Bull Trap can actually be detected early if you understand how it works.
Bull Trap Chronology
1. Prices are uptrend and close to the resistance level. Traders start entering with Buy positions because they anticipate Breakout.
2. When the price touches the resistance, the position of the trader who has a Sell Limit pending order will be triggered.
3. Along with the strengthening of prices, the seller's position begins to close one by one, both because of the Stop Loss and manual close by those who worry about Loss further.
4. When liquidity starts to run low, the price turns back to the resistance area.
5. The buyers who used to smile sweetly now began to panic and quickly close orders, thus pushing for a further decline.
Thus, there was a Bull Trap phenomenon that deceived buyers to buy during Breakout as if it would happen. Bull Trap is more than just a price pattern that describes Fake Breakout. If you are already proficient in understanding market behavior, then you will know if Bull Trap is a visualization of the actions of amateur traders who are often used by pro traders.
From the learning above, it appears that the victims of Bull Trap are those who like to make decisions too quickly. Not yet breaking the resistance, the buyer has interpreted the Uptrend forwarding signal. Meanwhile, sellers who set an Entry target in the resistance area are less able to install Stop Loss correctly, or are affected by excessive fear so that they quickly close positions without taking into account the potential of Bull Trap.
2. Recognizing the Bull Trap Pattern
In order to avoid panic that makes you trapped in Bull Trap, learn to identify the pattern, before making any trading decisions. Bull Trap only ensnared buyers who were hoping to continue the uptrend from the Breakout resistance indication. So naturally, the pattern to watch out for here is the Bearish Reversal formation in the resistance area.
In general, there are 3 types of price patterns detected that indicate Bull Trap.
A. First Pattern
Bullish Pin Bar that breaks resistance, but closes below that limit.
B. Second Pattern
A doji that breaks resistance but closes below it, then is followed by a bearish candle.
C. The Third Pattern
A bullish candle that has been closed above the price, but then followed by two bearish candles.
Often, this condition forms a 3 candle reversal pattern such as Three Inside Down, Three Outside Down, or Evening Star.
3. Develop a Bull Trap Trading Strategy
After knowing the Bull Trap patterns, then you need to act to respond to these conditions. If you are a breakout trader who only relies on a breakout signal for the Entry, then you should cancel Open Buy after detecting the appearance of the Bull Trap pattern.
But if you are flexible and can take advantage of opportunities under any circumstances, take the Bull Trap signal as an opportunity Entry from Bearish Reversal. Like the Price Action strategy in general, you don't need many indicators to compile the Setup Entry. The only indicator that is widely recommended to complete the Bull Trap strategy is period 20 MA (Moving Average), because the price crossing signal to the line can be used to confirm Reversal.
Setup Entry and Exit
To find the Entry target, use the price break from Low candle Bull Trap. Meanwhile, the most ideal Stop Loss estimate is in the High candle Bull Trap range. Following is the replication of the Entry and Exit settings in each Bull Trap pattern:
1. the first Bull Trap pattern
2. Second Bull Trap pattern
3. Second Bull Trap pattern
Beware of the Shortcomings of the Bull Trap Strategy
this technique also has weaknesses that need attention. The first negative point comes from the basic concept of Bull Trap which is actually a pattern of Price Action. Thus, the weakness of Price Action that tends to be subjective is also adopted by the Bull Trap strategy. In order not to mistake the price pattern, you can wait until the Bull Trap is confirmed. Crossing signal assistance from MA20 can also be added to add validation.
The second drawback of the Bull Trap strategy is the determination of resistance levels, which again can be subjective. Support Resistance can indeed be determined by a variety of methods, ranging from psychological levels, Pivot Points, Fibonacci, to dynamic ones such as long-term MA lines. Because of that, the resistance area where you stalk the Bull Trap may be different from the resistance observed by other traders.
Key to Success in Bull Trap Strategy
The Bull Trap strategy principle is to exploit the mistakes of buyers who rush into the market. So don't let you make the mistake while waiting for the Bull Trap opportunity. The key that really needs to be emphasized here is patience. Even if the Bullet Pin bar has broken the resistance, don't confirm it as a Bull Trap before the price is completely closed below resistance.
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