Bull traps are a real pain in the neck as they cause huge financial losses and can make players in the market run out of cash.
A bull trap occurs when the price starts to go up, but suddenly changes direction and goes down.
Reversal price movements like this create traps and sometimes lead to massive selling.
You may encounter a trap like this in the resistance area of the major currency pairs.
So let us explain how to predict the occurrence of such traps; how to recognize them in the early stages of formation.
Here’s how. Imagine there is an uptrend; then you realize the price went to the resistance level and broke through it; it doesn’t stop there and continues up to a higher level.
Then the next few candlesticks, the price didn’t stop suddenly, and the price started falling.
People who have opened long (bull) positions because they realized a break of the resistance are now starting to feel uncomfortable because the price touched their stop loss level.
So they are trapped, The general pattern of the bull candlestick bull trap chart breaks and closes above the resistance level, but the next 2 bars are bearish.
Another version of the bull trap chart pattern.
A bull trap candlestick broke through resistance and moved higher, but then closed below the resistance level forming a bearish candle.
Finding bull trap patterns as well as locks from resistance zones can be very difficult, especially for very novice traders. Sometimes you can be fooled by the market.
When you think that you have found a bull trap, it becomes a real breakout to the upside.
So to find a strong resistance level you should switch to a daily or weekly timeframe (any timeframe higher) and look at the chart.
Is there a stand-alone peak of the trading channel? If there is such a peak, then that is your resistance level (don’t be too lazy to do this to confirm your resistance level).
- Trading Strategies
- Now that you are learning how to spot bull traps, we would like to recommend some trading strategies to you.
- Currency pairs
- Hourly charts are recommended, but you can also use daily. H4 can too.
- Learn how to spot a bearish reversal candlestick in different timeframes.
- Technical tools
- Not required.
“Rules of the game”
- When you see the price rise to a resistance level, you should wait and see what happens when it reaches it;
- After the price has reached the resistance zone, and the formation of the bull trap chart pattern has started, you can place a sell stop pending order at least 2 pips below the lowest value of the candle that broke through the resistance zone;
- Then, place a stop loss of at least 2 pips above the highest value of this candlestick;
- Take profit should be placed at the previous lowest swing price level.