The market is in constant motion. The price changes direction frequently. And trading requires you to catch these movements and act accordingly. How to not get caught in the bear and bull traps? What are they? Today’s article will explain it to you.
What the bull and bear traps are
We can distinguish some important key levels on the chart such as trendlines, support and resistance, or significant moving averages.
Sometimes the price seems to break through these levels. But it does not. Instead, it goes in the opposite direction. This is a trap generated by the behaviour of some major players in the market. We can recognise bull and bear traps on the price chart.
The bull traps
The bull trap can be spotted at some important resistance levels. It happens when the price breaks through it and the bulls are opening long positions. They expect the price to move further upwards. But the price reverse and moves in the opposite direction. The traders who have opened long transactions are trapped. So they exit their positions or they wait for the price to hit stop loss level. When it happens, the momentum is getting bigger and the price falls even more.
It is very common that such resistance levels were tested on a regular basis in the past. Therefore, the confidence of the breakout traders is strong. This makes them fall into the bull trap.
The bear traps
Conversely, a bear trap can be identified near some support levels. The price breaks through it and the traders open short transactions. But the price rises and the traders exit their positions or wait for the price to reach the stop loss they have set. After the stop-loss orders are executed, the market gains momentum and the price moves further up.
Trading with the bull and bear traps
The first thing is to know the bear and bull traps can occur. This knowledge will help you to avoid them. But moreover, you can take advantage of them.
Find the support or resistance levels. Analyse the chart carefully to spot the moment the price is supposedly breaking through them. Open the position in the other direction.
When the price moves through the resistance level, enter a short transaction. When it cuts across the support, go long.
Final words
Knowledge is power. It is good to know the bull and bear traps exist. They happen on significant key levels. Trendlines, support or resistance, or important moving averages.
Spot them on time and avoid being caught in the trap. Or use the trap to your advantage and open the trading position in the opposite direction.
Practice finding the bull and bear traps in the Binomo demo account. It is available for free for Binomo traders.
Best of luck!